The di-SaaS-ter, or not, in markets
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Illustration: Aïda Amer/Axios
The so-called SaaS-pocalypse has come for all kinds of software companies, as AI upends the "software as a service " industry, or SaaS.
Why it matters: There are signs of rising financial stress for software makers, public and private, but as we head into the week, there are some reasons to believe a di-SaaS-ter could be averted.
The big picture: Everything is SaaS these days — nearly every piece of software people use, particularly at work, from Slack to Microsoft Word. Companies spend a ton of money for SaaS on a monthly or annual basis.
- Until very recently, investors in the private markets, like private equity firms, were extremely SaaS positive.
- The software business offered a safe, recurring stream of revenue. And growth prospects looked good.
- Then AI entered the chat.
Catch up quick: Last week, the stock market appeared to wake up to the notion that AI will change how these companies work, and they didn't like the vibes.
- Stock prices fell across the sector.
Zoom in: But signs of SaaS trouble in the private markets had been building well ahead of that ah-ha moment.
- An increasing share of loans backing software firms are trading at "distressed" levels, or below 80 cents on the dollar, according to data from PitchBook.
By the numbers: $25 billion in software loan volume was marked at distressed levels by the end of January — more than double what it was in December.
- 30% of all the distressed debt in this loan market is coming from the software sector, which makes up an outsized share of the overall market.
Between the lines: These are companies heading toward trouble, says Rachelle Kakouris, director of LCD Research at PitchBook. Think bankruptcies, restructuring, etc.
- During the pre-inflation days of 2020 and 2021, many of these companies were borrowing money at very low rates.
- "Now, the halcyon days are behind us," she says.
Reality check: There's much talk right now about SaaS disappearing, as companies could soon start writing their own code and software with AI.
- But companies move slowly, they already trust their SaaS providers, and it would be costly to start over.
- "Replacing a core SaaS platform is effectively open-heart surgery for an enterprise," per a note from PitchBook. More likely, their established providers will incorporate AI into their products.
- "There's a whole bunch of software companies whose stock prices are under a lot of pressure because somehow AI is going to replace them," Nvidia CEO Jensen Huang said last week. "It is the most illogical thing in the world."
- "Would you use a hammer or invent a new hammer?"
Flashback: This definitely isn't the first major disruption to the software business to roil markets and create uncertainty over the sector's future.
- The advent of the Internet made way for new huge players in software, like Google. Plenty of software companies went under or were absorbed or shrank. Lotus 1-2-3 ring a bell? Probably not if you're under 50 years old.
- Back in 2007, investor Paul Graham even wrote an obituary for Microsoft.
The bottom line: AI is disrupting the investment picture for the software business, but no one truly knows what will happen next.
