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. (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.)

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How we got here is instructive both for understanding why this particular sector is highly-valued now and also how this might apply someday to other sectors that make a similar radical shift in the business model.

A little perspective is useful.

That’s kindly provided by Jeffrey Meyers, a savvy chief investment officer at Cobia Capital Management, who shared his thoughts about the sector, from which much of the following derives. When the Cobia CIO says that SaaS has sucked the value out of software, he means that the new business model improved the industry enough that there are few, if any, value stocks left in SaaS, something he misses. Meyers, who’s a veteran investor in the small-cap technology value universe for 25 years, has seen “bubbles and blow-ups and everything in between.”

Bring your mind back, if you will, t...

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