Say goodbye to the SaaSpocalypse and hello to the RenaiSaaS

SaaSpocalypse, what SaaSpocalypse? The S&P 500 software sub-index, which has companies such as Salesforce, ServiceNow and Workday among its members, is now broadly where it started the year, having recovered from its swoon.

There are some good reasons for its resurgence. One is that the sell-off was overdone: investors, fearing that autonomous AI agents and legions of new vibe-coders would render software obsolete, fled the sector too fast and too indiscriminately. Another is that companies that sell software as a service (SaaS), through subscriptions or based on usage, are evolving.

Look at Salesforce. The provider of back-office software notched up one of its best quarters “ever” in the words of boss Marc Benioff. But, more importantly, it was able to show that it was a beneficiary of, rather than a sitting duck for, AI. Products that use the technology to manage customer relations, workflow and other business processes pulled in annual recurring revenues of more than $1.5bn in the quarter, almost a fifth of the total.

It’s not alone. Snowflake, among the earliest to deploy AI in its line-up, added 2,000 accounts to its CoCo coding assistant in the past quarter, bringing the tally above 9,000. Workday’s AI agents, billed as digital assistants capable of carrying out tasks across HR and payroll functions, are now used by more than 5,500 of its customers, up by a third quarter on quarter. The sector has also been innovative in its pricing, at least partially switching from billing a flat fee per user to charging for the amount of work that its clients actually use the platform to do.

Encouragingly, the “RenaiSaas” looks like it may be a more discriminating phenomenon than the SaaSpocalypse was. For one thing, while the sub-sector’s share price has broadly recovered since the spring, blockbuster results in the intervening period mean that company valuations remain subdued. Not all: Snowflake, yet to make a profit, is off the charts. But Salesforce and Workday, on mid-teen forward earnings multiples, look less outlandish.

That partly compensates for remaining risks. While SaaS companies can still claim ownership and understanding of clients’ data, it is true that AI will increasingly enable their clients to start running their own programmes. And, if they don’t want to deploy AI tools themselves, they can always turn to smaller upstarts that provide specialised services.

Sector share prices also show encouraging divergence. Cyber security companies such as Fortinet, CrowdStrike and DataDog are best placed to keep their outperformance. Salesforce and peers that are embedding AI in their line-ups occupy the middle ground. Adobe, more exposed to generative AI tools, is still down about a quarter in the year to date. Alongside the technology, investors’ attitudes also appear to be maturing.

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