Deep Dive: Topicus.com Inc. ($TOI) – Part 3
AI Disruption Risk, Topicus vs. Chapters Group, Churn Rates & More!
This is part 3 of my deep dive into Topicus. In the sections that follow (roughly 10,000 words), we’ll tackle the risks that investors need to keep in mind when evaluating the company’s future prospects.
By now, we’ve discussed Topicus’ strong growth strategy and capital-light model, but no investment comes without its challenges. One of the most critical risks on the horizon is the potential impact of AI disruption. As we explore in this part of the series, it’s absolutely crucial for investors to assess whether AI will serve as a catalyst for growth or if it could fundamentally disrupt Topicus’ core value proposition. Given the rise of AI-powered solutions across industries, understanding this risk will help you gauge the long-term viability of the company’s moat and its competitive positioning. Only if you understand this risk and arrive at a conclusion regarding its impact on Topicus’ terminal value, you will be able to value Topicus.
Additionally, we’ll look closely at Topicus’ balance sheet, evaluating its liquidity, leverage, and solvency to see how well the company is positioned to navigate any financial turbulence.
So without further ado, let’s go into it.
Part 1:
Part 2:
Table of contents of the series:
“BAM BAM BAM BAM BAM” 90-Second Pitch – Why Topicus and Why Now?
1) Understanding Topicus
1.1. The History of Topicus
1.2. Understanding the Ownership Structure of Topicus
1.3. Product
1.4. Business Operations
1.5. Customers
1.6. Industry & Competitive Landscape
2) Business Quality
2.1. Competitive Advantages Analysis
2.2. Other Thoughts on Business Quality
3) Management and Governance
3.1. Management Background
3.2. Management Philosophy
3.3. Integrity, Incentives, and Compensation
3.4. Capital Allocation and Management Talent
3.5. Board of Directors
4) Risks
4.1. The Elephant in the Room: AI
4.2. Topicus vs. Chapters Group
4.3. The Dutch Wealth Tax
4.4. False Moat Analysis
5) Financial Health
5.1. Balance Sheet Health
5.2. Operating Perspective
5.3. Off-Balance Sheet Items & Hidden Risks
6) Sentiment Analysis & Thoughts on Timing
7) Valuation
7.1. Past Growth
7.2. Future Growth (including a TAM analysis & discussion of the European market fragmentation)
7.3. Topicus’ Acquisition Strategy & Track Record
7.4. Recent Strategic Move Toward Minority Stakes
7.5. My Valuation Work
Conclusion
Appendix
Disclaimer: The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.
Part 4 – Risks
4.1. The Elephant in the Room: AI
If you’ve read the introduction to this deep dive series – and if you follow the markets closely, as I assume 100% of my readers do – you’ll know that AI risk is, and should be, front and center in this discussion.
And frankly, I would argue that this segment is likely the most relevant part of the entire series. The reason for this is simple: the current valuation of Topicus isn’t particularly demanding if the company can continue to execute its playbook for the long haul. That said, while I was working on this series, Topicus reported its Q4 results, and while we’ve seen undeniable continued success – the company reported a +20% topline growth, +23% FCFA2S growth (with a +40% quarter-on-quarter increase), and 6% organic maintenance growth – these results may not mean much if, in the coming years (4-5 years? 10 years?), the underlying business model or economics of the company face significant disruption.
“And if we think out three or four or five years, who knows if there will even be customer support reps or sales reps or software engineers? And I think that’s what’s causing the kind of hit to the share prices lately is this terminal value concern.” – Jared Sleeper on the Odd Lots podcast.
And that’s where AI’s role comes into play. As investors in Topicus or potential investors, understanding this question is crucial. The impact of AI on business models is not just a headline – it’s an existential concern that could shape the next decade for many companies.
So, here’s the approach I’ve taken: I’ve spent several hours curating the 15-20 most insightful articles, podcasts, interviews, and CEO commentary on the “AI will eat software” narrative (all linked further below). I’ve gathered opinions from the smartest minds, industry experts, and business operators. After compiling all this, I used AI to summarize the key points that have been raised, to provide a more structured understanding. Quite frankly, this worked worse than I expected, and I actually read all the material I had at hand again myself and added my own commentary. I backed up certain points of view with relevant quotes from the materials.
Anyway, overall this curated resource list will serve as the foundation for the risk assessment section of this Topicus deep dive, but let me be clear – these insights are equally relevant for any VMS acquirer or software company navigating this new AI-driven landscape.
I will, of course, share my own conclusions, but more importantly, I think you should arrive at your own conclusion, and for that, I attempt to provide a comprehensive list of arguments for each side of the debate.
I believe there are three plausible scenarios for how AI could impact VMS acquirers in the future. The aim is for you, the readers, to arrive at your own independent conclusions based on the data and analysis presented.