The writing is on the wall as AI companies race to add vertical functionality
Software stocks have taken a beating over the last month as investors grow concerned that AI could put vertical SaaS vendors out of business.
The downturn is remarkable for analysts in the tech sector who have seen top SaaS companies grow revenues by 20% or more each year, year after year.
“I think that investors are uncertain about SaaS stocks and how they create value,” Lisa Lawson, analyst with Omdia told The Register. “SaaS has been so lucky in that they’ve experienced double-digit [revenue] growth for a very long time. Like pretty impressive double-digit growth for a long time. Now that growth isn’t just based on how they can be more efficient. It’s that they have new competition in the form of OpenAI and Anthropic. So yes. Investors are concerned about how SaaS can continue to grow, and prove its value and price points.”
In the last month Adobe, Microsoft, Salesforce, SAP, ServiceNow and Oracle have shed more than $730 billion in value as of Tuesday's market close.
The iShares Expanded Tech Software Sector ETF, which houses 114 of the largest software stocks, is down 19 percent from a month ago, erasing the gains it has made since last April, and it is now nearly 30 percent off its high in September.
During ServiceNow’s earnings call last week, CEO Bill McDermott attributed the downturn to his company’s M&A strategy, which he said likely resulted in the loss of $10 billion in market cap. He told analysts on the call that the company was done making acquisitions.
“So now the worry is gone, you can give us back to market cap,” he said on the Jan. 28 call.
Alas, investors have only punished the stock more since they hung up the phone, sending share prices down 18 percent and erasing an additional $20 billion-plus from its market cap. The ITSM superstar that is used by enterprises around the world and posted strong earnings has lost $115 billion in market value since Jan. 5.
Lawson said there are reasons to be worried that this is not a blip.
“Just in January, both OpenAI and Anthropic announced a HIPAA-compliant life sciences health care tool that does directly compete against the Veevas of the world, and the Salesforce life sciences offerings,” Lawson said. “These are very specific examples of these AI first companies directly competing with SaaS and directly competing with both the platforms and vertical solutions, and point solutions.”
Those moves by two of the largest foundation models echo the warning that Microsoft CEO Satya Nadella issued a year ago, when he said AI agents posed a risk to SaaS companies. Over the last month, no software stock has lost more value than Microsoft: more than $450 billion in value as of close on Feb. 3.
“I think the notion that business applications exist, that’s probably where they will all collapse in the agent era, because if you think about it, they are essentially CRUD databases with a bunch of business logic. The business logic is all going to these agents. These agents are going to be multi-repo CRUD,” Nadella said on the Bg2 Pod referring to multi-repository create, read, update, delete databases. “They’re not going to discriminate between what the back end is. They’re going to update multiple databases and all the logic will be in the AI tier so to speak. Once the AI tier becomes the place where the logic is, then people will start replacing the backends.”
Nadella later compared it to the shift that happened when the relational database was created and separated the data tier from the application, which allowed developers to build business logic on top of the database.
“So the CRUD database will then get orchestrated outside of the business logic tier of the SaaS application is what’s going to happen,” he said.
However, Forrester vice president and principal analyst Charles Betz told The Register he doubts that will happen on a large scale.
“I don’t subscribe to his point of view for this simple reason: there are about 20,000 legal jurisdictions worldwide and complying with applicable regulation is a major reason why people trust vendors like SAP,” he said. “At the very least, we are many years away from agentic systems being able to ingest regulations and comply with them in the systems they are going to generate on the fly.”
Betz said AI is shaping customer behavior, but he sees it being used to support buying decisions, rather than a wholesale replacement of SaaS stacks. Besides, running a software stack is a lot of work.
“Even if you are using an AI to maintain it, keeping software up to date is a chore and a cost,” he said. “The economics of SaaS may change, I don’t doubt that. But this idea it evaporates? Nah.”
That’s the same point made by managed service provider Jason Slagle, CEO of CNWR Inc., which installs and operates massive hardware and software deployments, dealing with dozens of vendors, for customers across the US.
“So someone vibe codes some AI slop to do business functions. How do they maintain it? I see things integrating into Hubspot or Salesforce, not replacing it,” he told The Register. “That isn’t to say there won’t be corrections. There are a ton of underwhelming SaaS applications that are features not products. Those will be the ones to go. The stocks that are getting a beating are a correction from a huge overvaluation that we’ve seen for a number of years. That overvaluation is just moving to AI.” ®