One of the hardest-hit parts of the market this year has been software stocks. There has been a growing fear among investors that artificial intelligence (AI) will completely disrupt the software-as-a-service (SaaS) industry. As such, there has been pretty indiscriminate selling in the space, with few SaaS stocks spared.
There are three main tenets to the bear case against software stocks. One is simply that AI will result in fewer workers, which will hurt SaaS company revenue, since most price their subscriptions based on the number of users who have access to their platforms. The second is that with AI, those organizations will be more easily able to develop custom software, bypassing third-party vendors. Finally, some see large language model (LLM) developers like Anthropic and OpenAI looking to use AI to bypass the software layer entirely.
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In my view, all three sound like long shots. SaaS models will likely evolve over time from being more seat-based to consumption-based, which should address the first issue. Meanwhile, it’s never been difficult to create front-end software, but most organizations don’t want to be responsible for the maintenance and governance hassles, as it’s not worth the cost and risk.
Finally, AI likely isn’t going to eliminate the software layer but instead increase its importance by helping organizations better apply AI to increase efficiency and drive growth. AI needs structured data, and the software companies that control the data and workflow are of vital importance.
While there will be some SaaS casualties, this will not be the companies that created moats built on top of proprietary data and complex workflows. As such, I think ServiceNow (NYSE: NOW) is one of the best stocks to buy following the SaaS sell-off.
ServiceNow is tightly ingrained within its customers’ workflows, linking an organization’s data between information technology, human resources, and customer service. It is an important system of record built on security permissions, custom business logic, and audit trails.
Meanwhile, the company has leaned into AI to drive growth. Its Now Assist generative AI suite of solutions has seen its annual contract value rise to $600 million at the end of last quarter, with it projected to hit $1 billion by the end of this year. This is helping propel the company’s overall 20%-plus revenue growth.
