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How SaaS Removed Value Investing From Software

The valuations in the software sector known as Software as a Service, otherwise captured by the ungainly acronym SaaS, are said to be rich. Nobody likes to pay up, but value investors, in particular, are skinflints and balk at them. Salesforce.com (ticker: CRM), for example, trades at an enterprise value to sales (EV/S) ratio of seven times and rivals are similarly valued or even higher. (See table below.)

How we got here is instructive both for understanding why this...

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