When Former High-Growth Stars Turn into Share-Cannibals
How tech companies are buying back their own shares - and why this could be one of the most underrated sources of returns for investors.
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The past few years have been brutal for software investors like me. Valuations have plummeted even more sharply than growth. Narratives are being called into question due to the supposed disruption caused by AI. Even the best SaaS and platform business models must now prove that they generate sustainable cash flow.
Yet, it is precisely in this seemingly difficult environment that something exciting is happening. Many former high-growth companies are beginning to “cannibalize” themselves.
Not in a negative sense, but in the best sense: they are buying back massive amounts of their own shares.
What used to be seen as a sign of limited growth options is now, given drastically fallen valuations, becoming an increasingly strategic tool for capital allocation. In many cases, this will likely result in an extremely effective driver of returns that has been underestimated until now.
Companies like PayPal, Lyft, monday.com, and Upwork in my portfolio have one thing in common: their explosive growth of the early years has ended or is declining. Their business models are now established, and their focus is shifting to free cash flow.
This is exactly where buybacks come into play. As soon as a company generates sustainable cash flow, a simple question arises: What should be done with the money?
Reinvestment often only yields declining returns. Acquisitions are often risky and rarely successful. This raises the question of whether to buy back the company’s own shares. This option becomes increasingly attractive when the company’s stock appears undervalued. This is currently the case following the crash of many platform and SaaS stocks.
Let’s take a closer look at this using a few examples:
