Dissecting SaaS Risk in the Age of AI

SaaS companies are down 27% YTD, while the S&P 500 is roughly flat. The sector has become an increasing source of concern for investors. What we are witnessing is a transition into a new phase of the SaaS lifecycle. This sell-off marks the end of the halo period that long insulated SaaS from conventional competitive scrutiny. For more than a decade, capital flowed freely into software companies with little concern about existential risk. The business model appeared unusually insulated: long growth runways, recurring revenue, high gross margins, and high switching costs. This combination created ideal conditions for structural overvaluation. Our contention is that, for much of the time these companies have been public, they were overvalued because markets priced their economics as both durable and permanent.