The Future of Software
If an LLM Can Rebuild Your Product in a Weekend, Your Moat Isn’t a Moat
April 2026 · YK Research · Software / Valuation
Core Thesis
For 15 years the software business model was a gift: sell a seat, lock in the contract, compound the ARR. The stock market rewarded it with 60–80% of equity value sitting in terminal value. The unexamined assumption that the moat would still be there in year 11 and beyond.
That assumption only holds if the product is hard to rebuild. AI just changed what “hard” means. If an LLM can replicate the core of your software in weeks, or a weekend, the moat isn’t a moat, and the terminal value doesn’t exist. Which means 60–80% of the equity simply ceases to exist.
2025 was the first inning. Multiples quietly compressed. The market went long silicon, short SaaS. Software isn’t dead, but the software business model is getting rewritten in real time.
The Software Split: What Survives, What Dies
- Distribution-moated: platforms that own the user (Google, Meta, TikTok). The LLM clone doesn’t matter if nobody finds it.
- Data-moated: proprietary data you can’t scrape (Palantir ontologies, Bloomberg terminal, private-market data).
- Infra-moated: physical silicon, cloud regions, compute capacity. The stuff the LLM runs on.
- Regulation-moated: compliance, audit, systems of record in healthcare, defense, finance.
- Workflow-moated: mission-critical systems where the cost of getting it wrong is enormous (ERP for a public co., EHR for a hospital).
- Single-feature SaaS: note-taking, grammar, transcription, basic CRM. A weekend project with a decent prompt.
- Thin vertical tools: the “Shopify for X” wrappers where the X is commodity.
- Consumer ed-tech: Duolingo −67.5% from mid-2025 peak. ChatGPT is a free, personal, infinitely-patient tutor.
- Creative-tool rentiers: Adobe −24.6% from 2025 peak. Generative models ate the top of the funnel.
- PE-owned SaaS rollups: 1,900+ software cos bought for $440B (2015–25), now ~25% of the private-credit book. LBO debt serviced by cash flows AI is unbundling.
The one question every software company has to answer
“How will this not be unbundled by an LLM?”
If the honest answer is “data,” “distribution,” “regulation,” or “physics,” you might be fine. If the answer is “features” or “brand,” the terminal value is dying.
2018 to October 2025. Big Tech didn’t just get bigger, it doubled its slice of the entire index. Every one of those percentage points is priced on the assumption that the moat is real.
Most DCFs forecast 5–10 years of explicit cash flows. Everything past year 10 is a terminal value assumption, the belief the business still earns money in year 11+. That assumption is the whole ballgame.
Put the two together: 36% of America’s public equity rests on a 60–80% terminal-value fiction. That is the exposure.
2025 Scoreboard: Long Silicon, Short SaaS
The Question Every Business Has to Answer
“How will this not be unbundled by an LLM?”
If there's no credible answer, the terminal value assumption is dead.
Three Stages of the Repricing
P/E compression
Market applies a larger discount factor to future cash flows. Multiples quietly compress. We're here now.
P/E → FCF multiples
Market flips from earnings-based multiples to multiples of current free cash flow. GAAP-only reporting. No more adj. EBITDA. SBC treated as the real cost it is.
Short-duration world
Growth investing breaks. Pre-revenue unicorns de-fund. Capital rotates to physical world. M&A logic inverts. Short-termism becomes rational.
Signal the flip from Stage 1 to Stage 2: watch companies stop reporting adjusted EBITDA. When SBC finally gets treated as the real cost it always was, the regime has shifted.
Four Implications If This Plays Out
Growth equity math breaks
Pay-now-harvest-later only works if 'later' is financeable. A 12x ARR multiple presumes a moat that compounds. If LLMs unbundle the moat, the 12x is a fiction.
Private credit is the canary
PE bought 1,900+ SaaS cos for $440B (2015–25). Software is now ~25% of private credit. Cash flows repay the LBO debt. If AI replaces the product, cash flows die, loans default. Watch the default rate.
The AI capex paradox
$300–500B/yr of AI infra only pays back over 7–15 years. If markets reprice to short-duration multiples, that capex can't be financed. The disruption engine disrupts its own funding.
Likely outcome: oscillation
Not a permanent new regime. An oscillating one. Shorter cycles, higher vol, terminal values compress and recover as AI capex ebbs and flows. Fat tails, not a new mean.
Five Forms of Leverage in an AI-Divided World
The geopolitical organizing principle is no longer who protects you, but who gives you access to prosperity. If you are not the US or China, the honest answer is you have almost nothing to negotiate with. Almost. Five forms of leverage still matter. Countries that hold any of these have something to trade. Countries that hold none face an uncomfortable question: which version of intelligence do they rent, and what do they concede in return?
Critical Minerals
Rare earths, lithium, gallium, copper. The raw inputs to every chip and every grid upgrade.
AU, CA, CL, ID
High-Tech Manufacturing
Endemic fab capacity, lithography, advanced packaging. Hard to move, harder to replicate.
TW, KR, NL, JP
Capital
Deployable sovereign balance sheet. Can fund the next fab, the next grid, or the next deal.
SG, UAE, CH, NO
Energy
Gigawatt-scale power, cheap and firm. Data centers are power plants with chips attached.
SA, QA, US, AU
Data Center Infra
Land, cooling, fibre, permitting speed. The physical substrate AI runs on.
US, IE, SG, NL
Investment read: every one of these five levers is a physical asset class. None of them are software. This is the same point the multiples are making, just in different language.
Atoms, Not Bits
The lasting bottlenecks in the AI stack are physical: critical minerals, energy storage, and actuation. The same logic applies to capital allocation.
“If your moat requires atoms, not bits, a better language model cannot unbundle it overnight. For now.”
The two-word test before any long position: atoms or bits? If the answer is bits alone, keep the size small.
The Sovereign Megacorp
The logical endpoint of Big Tech hitting its stride is the vertically integrated megacorp: a firm so embedded in physical supply chains that it becomes too big to disrupt. Elon is assembling one in the open, with Tesla, SpaceX, and xAI converging into a single industrial entity. These companies are starting to finance themselves like sovereign states.
Issued long-dated paper that only makes sense for entities assumed to still exist in 2066.
Century bond, the first tech issuer to try. Priced with confidence that the franchise outlives most nations.
The market agreed. Credit is pricing these firms as sovereigns, not companies.
The same dominance invites trust-busting. Big Tech is the modern railroad monopoly, hoarding talent, stifling innovation, and concentrating wealth. The sovereign balance sheet is a target as much as a moat.
Portfolio read: sovereign megacorps are the closest thing to “atoms plus bits” you can own on public equity markets. Keep them long, but size around regulatory tail risk.
Positioning Takeaways
Single-feature SaaS, thin vertical software, PE-owned rollups levered against cash flows the LLM can eat. Especially anything still trading on 10–15x ARR post–2025.
Oscillating terminal value = fat tails, not a new mean. IV on hyperscalers stays bid. Fits the option seller's playbook and harvest the premium, size for the drawdown.
If Stage 2 arrives, 10-year DCFs are fantasy. Reprice your own book to what you can prove in 2–3 years. Earnings, not narrative.
The partial move is already underway. A full repricing would be the most consequential structural shift in capital markets since the postwar era. You don't need to bet that it happens fast. You need a book that survives whether it does or doesn't: long the stuff that has to exist regardless, short the stuff whose moat is a sentence.
Social Capital, “2025 Annual Letter” (April 2026). Read the original. This write-up extracts and frames the valuation-multiple thesis for YK Research; interpretation and trade framing are ours.