European software and technology companies get a fraction of the screening attention their semiconductor counterparts receive, despite trading at a persistent, measurable valuation discount to comparable US SaaS peers for similar growth and margin profiles. This guide covers the broader software and enterprise technology segment specifically — SAP, Dassault Systèmes, Temenos, and the smaller Nordic and German SaaS names beneath them — distinct from the hardware-and-manufacturing-heavy semiconductor sector already covered on this blog.
Last updated: July 2026.
Why software needs its own screening lens, distinct from general industrials
Revenue quality matters more than for most sectors: Recurring, subscription-based revenue is structurally more valuable than one-off licence sales, since it's more predictable and typically comes with higher gross margins. A screen that treats all "revenue growth" as equivalent misses this distinction — where disclosed, recurring or subscription revenue as a percentage of total revenue is a meaningful quality signal.
Gross margin is unusually informative: Software's near-zero marginal delivery cost means gross margin is one of the cleanest single indicators of competitive position and business model quality — a mature software company below 60% gross margin is a genuine outlier worth investigating, in a way that wouldn't be true for most other sectors.
Growth and profitability need to be evaluated together, not separately: Rule of 40 — revenue growth rate plus profit margin — is the standard framework for this specific reason, and it's applied to European software companies far less often than to their US counterparts despite working identically well.
Capitalised development costs can distort reported earnings: Some European software companies capitalise a portion of development spend rather than expensing it immediately, which can inflate reported near-term profitability relative to a company expensing the equivalent spend. Checking free cash flow alongside reported operating margin helps catch this.
The right metrics for screening European software and technology
Revenue growth and recurring revenue mix
Revenue growth remains the primary top-line signal, but for software specifically, the mix matters — a company growing 15% with 90% recurring revenue has a fundamentally more durable growth profile than one growing 15% with a large one-off licence or services component.
Gross margin
Software gross margins above 65–70% are standard for mature, well-run platforms; below 50% is unusual and worth investigating (heavy professional services revenue mix, or a less software-native business model than the label suggests).
Rule of 40
Combining revenue growth and margin into a single screening signal is the standard software-sector framework, and it applies to European names exactly as it does to US ones — with the added context that European software companies tend to sit further toward the profitability side of the growth/margin trade-off than their more aggressively growth-funded US peers.
Net revenue retention (where disclosed)
For subscription businesses, net revenue retention (existing customer revenue growth, including upsells and net of churn) is one of the more powerful quality signals available — above 110% indicates the existing customer base alone is a meaningful growth engine, independent of new customer acquisition. Disclosure of this metric is less consistent among European software companies than among US SaaS peers, but where available it's worth weighting heavily.
Free cash flow relative to reported operating income
As noted above, capitalised development costs and stock-based compensation treatment can create gaps between reported operating income and actual free cash flow generation — checking both is more reliable than either alone.
Where the European software discount comes from
European enterprise software and SaaS companies with comparable growth and margin profiles to US peers frequently trade at meaningfully lower revenue multiples — a pattern with several contributing, and only partially justified, explanations:
Genuinely lower average growth rates: Some of the discount reflects real differences — European software companies, on average, have historically grown somewhat more conservatively than the most aggressive US venture-funded SaaS cohort.
Less analyst and investor attention: European tech coverage is thinner outside the largest names (SAP, Dassault Systèmes), meaning smaller, genuinely comparable growth-and-margin profiles simply receive less scrutiny and capital flow than similar US names.
Currency and index effects: Global tech-focused funds are disproportionately benchmarked against and flow toward US indices, structurally reducing capital allocated to comparable European names regardless of fundamentals.
Building a European software screen
Core Rule of 40 quality screen:
- Sector: Technology / Software
- Revenue growth (YoY) + Operating margin ≥ 40 (see Rule of 40 screening for the full methodology)
- Gross margin > 60%
- Sort by: combined Rule of 40 score descending
Under-followed candidate screen:
- Sector: Technology / Software
- Market cap: €200M–€3B (below the largest, most-covered names)
- Revenue growth (3yr CAGR) > 10%
- Gross margin > 60%
- Sort by: market cap ascending