It’s been a fruitful decade for Software as a Service (SaaS) stocks, as businesses and individuals raced to access exciting new offerings like the cloud, but for many the skies are quickly darkening.
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The surge towards digitalization and cloud-based services, growth in remote working and predictable revenues from subscription fees have bolstered the sector, with the Nasdaq Emerging Cloud Index climbing from 849 in late 2018 to over 1,500 today.
Cloud Winners
Monday.com (MNDY), whose cloud-based operating system allows businesses to plan and track workplace projects and activities, is a prime example. Its stock has risen over 27% in the last three years, with total revenues climbing from $161 million in December 2020 to $972 million in December 2024.
Palantir Technologies (PLTR) is another SaaS provider, perhaps best known for software services in the areas of counterintelligence and defense. Its share price has rocketed around 1800% in the last three years to a current best-ever $186, with revenues increasing from $1 billion in 2020 to $3 billion in 2024.
Palantir has a market value of around $443 billion, with Monday.com valued much lower at nearly $9 billion.
“Five years ago, we had a bull market for SaaS growth names and now it’s unwinding as several negatives hit,” said David Russell, Global Head of Market Strategy at TradeStation. “Software companies face AI cannibalization, high multiples, and a secular slowdown in white collar employment.”
He added that while companies like Palantir and Microsoft (MSFT) hit new highs this month, “other software stocks are going the other way.” An example of this can be seen above.
Different Directions
Indeed, Monday.com’s share price has dipped over 40% in the last three months. That’s despite its recent Q2 numbers revealing revenues of $299 million, a 27% year-over-year growth. Within this it said that monday CRM had reached $100 million in annual recurring revenue, indicating strong demand for flexible and customizable CRM solutions. It also highlighted its new AI-powered capabilities, such as monday magic, monday vibe, and monday sidekick.
However, its Q3 revenue guidance of about $311 to $313 million was slightly below analyst expectations at the midpoint hitting sentiment.
Cloud-based platform Wix (WIX) has also seen a 36% drop in the last three months, despite recently revealing a 12% year-over-year increase in total revenue to $489.9 million. GoDaddy (GDDY) is down 25% in the same period, again after an 8% hike in Q2 total revenues of $1.2 billion.
“When people sell stocks on decent earnings it can mean they are ‘in distribution’,” said Russell. “High multiples from the boom years put these companies at risk of more selling, even if they keep beating estimates. This may apply to companies not falling, yet, such as DataDog (DDOG), CrowdStrike (CRWD) and Intuit (INTU).”
White Collar Woes
Monday.com is one of the stocks, alongside Gartner (IT), Asana (ASAN) and Atlassian (TEAM), which Russell believes are being hit by an employment “double-whammy” with flatlining growth in secular white-collar employment and cyclical weakness in the economy as it slows.
Indeed, figures from the Federal Reserve Bank of St. Louis show that Nonfarm private payroll employment for Professional & Business Services climbed from 17 million in 2011 to 23 million in 2023 but has remained flat ever since.
In addition, before the July U.S. employment report it was assumed that the economy had added 291,000 jobs between May and June. In actuality, the US economy only added 33,000.
Also raising fears over the strength of the economy were continuing claims, a proxy for the number of people receiving benefits, climbing by 38,000 to 1.97 million in the week ended July 26. This is the highest number since 2021.
Declining white-collar employment reduces the pool of potential users of business software.
Other stocks hit by a weakening economy could include TradeDesk (TTD), WIX, Twilio (TWLO), GDDY, HubSpot (HUBS), Bill.com (BILL), Dayforce (DAY) and Accenture (ACN).
AI Cannibals
AI may also be a differentiator between the likes of Palantir and Microsoft and other established software stocks.
A recent study from Alix Partners found that more than 100 public software companies are getting ‘squeezed’ or cannibalized by AI.
“Generative AI is fundamentally transforming enterprise software, posing a significant challenge to traditional Software-as-a-Service (SaaS) models. AI agents are no longer just digital assistants; they are becoming core components of business applications, a shift that is particularly impacting midmarket companies,” it stated. “Midsize SaaS vendors are feeling the squeeze as they face growing competition from AI-native start-ups as well as tech giants like Microsoft, who are rapidly integrating advanced AI capabilities into their offerings.”
SaaS players, like Monday.com, can adapt and transition to AI, but there are dangers. According to Alix Partners a “successful transition requires a brand-new business model and thoughtful implementation across product roadmap, pricing, sales, and operations. Without careful planning, transition to GenAI and AI agents could just as easily disrupt revenues as it could enhance them.”
In another recent report Bain Capital agreed that Generative and agentic AI are disrupting SaaS by automating tasks and replicating workflows. It stated that SaaS leaders can manage the risks by identifying where AI can enhance their offerings and where it might replace them.
“To stay ahead, they must own the data, lead on standards, and price for outcomes, not log-ons, in an AI-first world,” Bain said. “AI needs to be a core capability, not a side project. That means helping your teams understand what AI can and can’t do, hiring or training the right talent (from machine learning engineers to prompt designers), and building a culture that’s excited about innovation.”
AI is certainly impacting employment decisions and not, necessarily, strengthening businesses. Earlier this month, Indian outsourcing giant Tata Consultancy Services’ (TCS) decision to cut over 12,000 jobs was linked to an increased use of AI tools and services.
Shifting Value
Russell says that SaaS stocks vulnerable to AI include ServiceNow (NOW), Gartner (IT), Salesforce (CRM), Accenture (ACN) and Adobe (ADBE) with the latter under pressure from Australian software firm Canva.
Melius Research analyst Ben Reitzes also highlighted Figma (FIG) and Runway as Adobe rivals. He recently downgraded Adobe to a Sell, reducing its price target to $310 from $400.
“The world is coming around to the reality that ‘AI is eating software,'” Reitzes said in a client note. “Software-as-a-service companies are in the “early innings” of multiple contraction given the shift to AI. Former darlings like Adobe, Atlassian and Salesforce are all down more than 20% year to date and still going. Value is shifting to “infrastructure winners” like Microsoft and Oracle (ORCL). It could actually get worse.”