Since January 28th, software stocks in the United States have shed nearly $1 trillion in cumulative value, in some cases wiping out years of returns in just a little over a week. Ironically, the cause of this crash is ongoing AI innovation, a force that has repeatedly propelled the market to new highs throughout the past few years. Will AI fundamentally disrupt SaaS software stocks, or is this pullback an overreaction that could present attractive buying opportunities for investors?
What Triggered the Software Selloff?
The trigger for the recent SaaS crash was the release of a new suite of tools by Anthropic, the startup behind the Claude family of LLMs. These new tools gave Claude’s Cowork agent the ability to handle complex workflows. For example, Anthropic’s new tools can autonomously perform complex tasks in customer relationship management systems that would normally require human employees. Unsurprisingly, shares of Salesforce (NYSE:CRM) are down more than 25 percent on a trailing 30-day basis. The Cowork agent can also handle tasks such as legal research and data analytics using the new tools introduced by Anthropic.
With such agents increasing the efficiency of human users, businesses will have to buy fewer software licenses, putting significant strain on the recurring revenues generated by enterprise software firms. In time, some bears worry that AI could even replace SaaS providers altogether by making it possible for businesses to create their own workflows at low cost.
The release of these tools turned a widely-held narrative on its head, namely that AI would prove to be a tailwind for SaaS businesses instead of a disruptive force that would work against them. However, there’s also more than investor fear of future disruption playing into the SaaS crash. Revenue growth among enterprise software providers has been slowing considerably, partially due to the availability of lower-cost AI solutions.
How Real Is the AI Threat to SaaS?
Although investors are clearly extremely concerned about the effect of AI on SaaS businesses, there could still be paths for enterprise software providers to remain competitive. Crucially, many of these businesses are exploring alternative pricing models to mitigate the downward pressure on the number of licenses needed when AI enables one employee to complete tasks that once required up to five. Software companies are increasingly embracing hybrid pricing models that put less emphasis on features available at certain price tiers and subscription counts. Usage-based pricing, often with a fixed fee component as a baseline, solves some of these issues.
It’s also worth noting that legacy SaaS providers have a competitive advantage over AI in the form of proprietary customer data collected and stored over many years. To replace SaaS licenses with AI fully, businesses would be giving up crucial record-keeping tools and embracing completely new workflows. As a result, it could still be quite some time before SaaS tools that have served organizations well for years or decades become irrelevant in the face of AI.
Finally, AI could still be a positive development for some SaaS offerings, rather than a purely disruptive force. By deploying AI to enhance their product offerings, SaaS providers may be able to get out in front of the disruptive wave of innovation that is currently taking place. Although it’s almost inevitable that AI will eventually cannibalize parts of the enterprise software market, entrenched businesses may be able to leverage technological change to their advantage instead of allowing it to overtake them.
Will the Saaspocalypse Create Buying Opportunities?
Right now, the market appears to be selling off SaaS stocks almost indiscriminately, with investors rushing for the exits as prices collapse. Though it’s not impossible that AI really will fundamentally disrupt the software industry, such massive selloffs across large numbers of businesses can create attractive entry points for value investors with a sufficient tolerance for risk.
One thing that many analysts and market observers agree on is that the recent wipeout of value among SaaS stocks is likely an overreaction fueled more by market sentiment than the fundamental challenges facing SaaS businesses. While new agentic AI tools present real threats to the enterprise software market, large SaaS platforms that act as systems of record and provide standardized workflows across large organizations don’t seem to be in immediate danger of disappearing.
To illustrate just how drastic the selloff has been, let’s once again consider Salesforce stock as an example. With the losses of recent trading days, CRM has fallen to a price of $191.35. Analyst price forecasts, however, still call for a consensus price target of $327.96, more than 70 percent above the current price. CRM’s P/E ratio is also down to 25.5, a massive reduction considering the fact that Salesforce has traded at 40 times earnings or more for several years up to this point. Though this doesn’t inherently mean that Salesforce is a buy, it does illustrate the kind of compression in valuations that’s currently taking place across the software industry. With so many large, profitable businesses selling off rapidly on fears of disruption, it’s likely that undervalued buying opportunities will present themselves as a result of high volatility.
Tying it All Together: Will AI Disrupt SaaS?
While the market may be overreacting to the news of Anthropic’s new tools, there’s little doubt that AI will have large impacts on the enterprise software business. AI automation will almost certainly call for changes to pricing models, as well as force SaaS companies to deploy their own AI tools within their software to remain competitive. Some workflows that have traditionally been handled through large software platforms, meanwhile, will almost certainly be taken over by AI. In this sense, AI can be seen as a disruptive force for SaaS.
The question, however, is whether the increasing prevalence of agentic AI will doom traditional SaaS companies. For now, this doesn’t seem likely. SaaS platforms are still used widely by businesses and other organizations, and their role in maintaining data still makes them very valuable. Even though the enterprise software ecosystem is likely in for large changes in the coming years, it seems unlikely that the massive drop in SaaS stocks accurately reflects the risks and opportunities presented by AI.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.