It's true that the world was overly flooded with "software-as-a-service" companies over the past fifteen years. The question now, is who survives.
The rise of "Saas" was also intertwined with the rise of private equity and private credit. These buyers loved the predictability of subscription service revenue streams. Until the double punch of soaring interest rates post-Covid, plus the arrival of software AI like Claude, has now upended that lucrative model.
Shares of Ares, Blue Owl, and KKR were down roughly 10% yesterday as the IGV software ETF sank for the twelfth straight session, bringing its drop to 30% since last fall. BTIG is calling it the "Pre-Valentine's Day SaasAcre." The IGV's relative strength is now below 20, a.k.a., "extremely oversold" territory. J.P. Morgan called the selloff yesterday "a broad, sweeping mass exodus of software stocks."
At some point, you'd have to expect the buyers to step in. Call me crazy, but I just don't expect Claude Cowork to make stalwarts like Salesforce totally obsolete. I frankly agree with Box CEO Aaron Levie. Is Ford going to run its supply chain off of these new tools? Are companies going to waste time building their own sales portals and training workers on them?
To illustrate how investors might be thinking through this, Jim Cramer talks about the "Rule of 40" in his latest book. That is, you take a company's annual revenue growth and add it to the profit margin, and if it's over 40, as Jim says, "you have a winner."
He even uses Salesforce, whose score for fiscal 2025 was 41.7, as an example. For this year, analysts still expect 9% revenue growth, and a 34% operating margin (both slight increases), so its score would actually rise. But even if it dips, this is still rarefied territory--and yet its share price has been nearly cut in half over the past fifteen months, and its multiple has dropped from 35 to 15.
ServiceNow, another of his examples, had a score of 52 in 2024. For 2026, it's still expected to grow a conservative 19-20%, with margins rising a point to 32. That's a pretty similar result, and yet since late 2024 the stock has been chopped more than in half.
For smaller, newer, less essential software plays, it could be a very different story. And many of those may be in private hands, which is why the market is treating the private market players so poorly. But the publicly listed ones mentioned earlier are at least seeing a bounce today. It's the privately held private companies where the problems could be harder to spot. (Got that?!)
"Tech eats itself," wrote Jim Reid of Deutsch Bank this morning, pointing out the irony that the arrival of AI is so far doing the most damage to other technology plays. Remember when software was eating the world? Now, AI is eating software.
See you at 1 p.m!
Kelly