This week, I looked deeper into publicly traded software and technology companies. Over the last two or three months, some of these names are down over 30%. I wanted to know if they’ve become cheap and could appeal to value-minded investors.

Now, a lower stock price doesn’t mean a company is being offered at a cheap price (see cheap vs. low here). The only way I can determine if something is cheap is by determining its value first and then comparing its value to the price at which it’s being offered. If its price is below its value, it’s likely cheap.

I picked a few names and did some quick, back-of-the-envelope math to value them. I looked only at software and technology companies that were increasing in three areas: revenues (or equivalent), cash provided by operating activities, and free cash flow. Said differently, they had to be increasing top line, generating more cash, and putting more cash in their bank account.

I determined how much net cash each company has on its balance sheet. Think cash, treasuries, etc., minus short- and long-term debt. For example, a company has $ 4 billion in cash equivalents but $1 billion in total debt. Its net cash position is $3 billion.

I then subtracted that net cash amount from the market capitalization (i.e., valuation) to determine the enterprise value of the company. For example, a company with a $10 billion market cap but $3 billion in net cash has an enterprise value of roughly $7 billion.

Next, I looked at the statement of cash flows to determine the trailing 12 months of cash provided by operating activities. Some people like free cash flow, but I like cash provided by operating activities because it’s a good estimate of how much cash the company generated from its core business and could hypothetically distribute to shareholders. Again, this isn’t the perfect figure to look at, but for quick, back-of-the-envelope math, it does the trick for me.

I then divide the enterprise value by the trailing 12 months of cash provided by operating activities to determine the operating cash flow yield. For example, a company with a $7 billion enterprise value that generated $700 million in cash from operating activities in the last year is generating a 10% annual operating cash yield on an investment made at a $7 billon enterprise value. In theory, over 10 years (assuming no growth, no taxes, etc.), the company would generate an additional $7 billion in cash. It could distribute that $7 billion to shareholders, which means anyone who bought at a $7 billion enterprise value would have made their money back over those 10 years. Alternatively, if no distributions were made to shareholders, there’d be an extra $7 billion in the company’s bank account, so net cash would increase by $7 billion (assuming they didn’t reinvest any of the cash). This is a simple example that ignores lots of potential nuance, but you get the gist.

The result of my analysis was eye-opening. Some of the software and technology names I examined (mid- and small-cap companies) were trading at very attractive yields considering that the current 10-year treasury is ~4% and historically it’s ~6% (see here). One mid-cap software name was trading at an almost 9% yield. It’s an application software company, so the threat of AI is a real unknown for them and the durability of their cash flows isn’t crystal clear right now. But that’s still an attractive yield for a company that’s currently growing at over 20% and whose growth rate likely won’t go down in the short-term to medium-term.

My gut feeling is that the baby might have been thrown out with the bathwater. Some software and technology names are currently offering attractive operating cash yields. There’s more risk than with something like a 10-year treasury, for sure, but I’d imagine that savvy, value-oriented investors are analyzing these companies and closely watching the ones with strong moats that AI can’t easily erode and whose cash flows seem durable and likely to continue increasing.

I can’t predict the future, but my rough math indicates that today, some (not all) public software and technology company valuations reflect reduced potential downside (risk) and increased potential upside (reward).

I’m curious to see how things in the stock market play out going forward.