What is going on with Software stocks / SaaSmageddon?
Is all hope lost for Software stocks?
Invest at your own risk; this is not financial advice! This is not a recommendation to buy or sell any securities discussed in the article.
I hope you had a great start to the year, and you are working on becoming the best version of yourself for this year.
When I look at my portfolio, 2026 is off to a fantastic start so far. The performance of mine was jump-started by my two largest positions, Alphabet and ASML. Alphabet and ASML are up 6% and 27%, respectively. I have been very vocal about both companies in recent months and especially last year, when Alphabet was seen as the great AI loser (yeah, that was nonsense) and ASML was somehow being disrupted by China and DeepSeek (haven’t heard anything from them in a while).
Both cases present a fantastic analogy to the two companies that caused the largest drag in my portfolio: Adobe and Salesforce. There are a couple of parallels that can be drawn between the two sides of the (portfolio performance) coin.
Alphabet the AI loser:
Before we talk about AI, make sure to know about the latest trends and how AI relates to former historic moments of new technology:
Last year, there was quite some hype around the idea that increased usage of LLM models, mainly ChatGPT, would lead Alphabet’s cash machine (Google Search) to lose market share and therefore render Alphabet somewhat irrelevant. I laid out my thesis publicly and used the opportunity to buy a lot of Alphabet shares. Less than a year later, the thesis played out exactly as intended, and the only remaining question is (as always when things work out): Why did I not buy even more?
The following excerpt in italics is what I wrote in March 2025.
Investing doesn’t have to be hard. I bet all of you know and have used Google for the last 15+ years. Compared to that, most people kept searching for the next star instead of just buying Alphabet. Consider me one of these investors before I finally saw the light and bought Alphabet shares in 2018 as a long-term holding and not just as a trading position.
To google has become a synonym for searching for information online. Now add YouTube, Google Maps, etc, and you will find many apps that you can’t imagine living without. That’s a great foundation for a company and therefore an interesting investment.
Where it gets interesting is the fact that the stock of Alphabet, the holding company of Google, is significantly cheaper than the broad market, even though it is one of the very best companies. Alphabet’s EV/net income is at 19.1, and the earnings are supposed to continue to grow at 15% per annum. Based on the forecast for FY2025, we are looking at an EV/net income of 17.5. On a P/E level (this excludes the large cash surplus of Alphabet), the stock is trading at the lowest end.
Apart from Google search, the company is rolling out its self-driving cars, Waymo, in more and more cities.
Google Cloud keeps growing both on a revenue level and, even more importantly, the business is now contributing billions in profit to Alpahebt. Many companies would kill to own such a cash-generating machine.
And then there is YouTube. YouTube keeps growing, and I am a paying subscriber since you can’t use it anymore without being a paid subscriber due to all the ads. From Alphabet’s point of view, this is intentional: Either generate money through advertisements or make recurring revenue from paying subscribers. What a fantastic business model.
Compared to Amazon Prime, Disney+, Netflix, etc, Alphabet pays a fraction for the content. The content is generated for free by the many users, and the payouts to these users are minimal compared to the revenue they generate for Alphabet.
At the same time, YouTube even overtook the OG of podcasts, Spotify, to become the most-used platform for podcast listeners. The podcast industry keeps growing, and so does YouTube’s relative and, therefore, absolute share.
That a company of the size of Alphabet can grow its income at this rate is obscene. Google Cloud will continue to add billions in earnings over the next few quarters.
I believe that in a couple of months, a lot of investors will look back and be surprised that they missed buying Alphabet at such a great price. It is your chance to add this wonderful company to your portfolio or increase your position if you already own some shares.
Evene Gemini (Alphabet’s LLM) is now beating ChatGPT in many categories and is constantly gaining market share. Here is the updated price chart for Alphabet since my article. I hope you participated. If you did, I would love to welcome you as a paid subscriber ❤️
ASML is being disrupted by China
ASML, one of the most fantastic companies that the world has to offer and one of the few European tech powerhouses left, faced a somewhat similar story to Alpahebt. With the launch of DeepSeek and the early (later falsified) claims that it was trained on a handful of older Nvidia GPUs, the questions arose: Do we still need all these very expensive Nvidia GPUs, or can we scale down CapEx? In return, ASML would sell fewer of its expensive chip-making machines, and voila, the stock dropped.
This is what I wrote in March 2025
Companies like ASML rarely come cheap, but there are moments of relative undervaluation. If you have missed those in the past, now is your chance to buy some ASML.
You know how the story turned out, and one of the largest companies in the world nearly doubled since my March article. Talk about efficient markets. Again, I hope that you participated in the rally.
This brings me back to the start of the article: History doens’t repeat, but it rhymes. And here we have two powerful examples of established companies that were caught in a (false) narrative. In both cases, as it often happens, price drives the sentiment. Meaning low stock prices lead to bad news, which drives down prices even further. Coming back to the title:
What is going on with Software stocks / SaaSmageddon?
SaaSmageddon is a term I came across X in the last few days quite often. It refers to the Armageddon of SaaS (Software as a Service) stocks. Given the performance of some of the largest SaaS stocks since January 1st and also the last 365 days, it seems to be not too far-fetched to talk about SaaSmageddon.
While I understand the performance of a company like Figma (FIG), which was pushed through its IPO at an insane valuation onto retail investors, others don’t make too much sense. What exactly has changed so much in recent months?
What is driving the decline?
Funnily enough, the same thing that drove Google’s stock down: The rise of LLMs. This time, it is their powerful capabilities in coding. The theory goes as follows:
With the rise of AI (vibe) coding, anyone can swiftly write their own code and therefore programs. What is vibe coding? You write in plain text what you want to build, and the AI writes the code for it. In theory, anyone can now turn their idea into a best-selling app without having coding skills. This video explains it in a humorous way:
Companies with high pricing, such as Adobe and Salesforce, seem to be destined to lose market share since customers will just replace them with their own tools or alternatives from new competitors.
The alternative is that new competitors arise faster than ever and threaten the status quo. While I am sure that there are many new companies rising and code is written faster than ever before, there are some other reasons why Adobe and Salesforce got so big. And it is more than just their lines of code.
Is all hope lost? Are there any barriers to entry for new contestants?
Before we continue, you will find my deep dives on both Adobe and Salesforce below. These articles will give you a great understanding of both companies:
Keep in mind that Adobe does a lot of B2B business and is not just a free Acrobot reader and photo editing software. The same goes for most of the companies that are facing large drawdowns in their stock price.
To name a few reasons why a new solution will not replace the incumbents within a short time frame:
Customer relations
Let’s have a look at where Salesforce spends its operating expenses. As you can see, Research and Development was $5.8 billion in the last twelve months. That is a lot of money. That number dwarves when you compare it to what Salesforce spends on Selling, Marketing, and Administrative. With $16.7 billion, the figure is almost 3x larger.
All those sales guys must be doing something. And that is selling. They will visit you, write you a nice email, remember your birthday, send you a nice card, and maybe, just maybe, they are one of the reasons why you place such a large order with the company.
Even when a new and shiny tool comes up, you must sell it. Otherwise, no one buys it. Sounds weird, but that’s the truth. There is some truth to this quote:
Trust
Let’s take the example of Adobe. Would you trust your digital signature to a self-programmed or cheap copycat of Adobe? Or would you stay with Acrobot Signature even though it is so expensive?
The same goes for your cherished customer data. Would you hand those over to some random build CRM where you don’t even know where the data resides? Or would you go with the established player?
You see where I am going with this. Trust must be earned and can’t be (vibe) coded. And trust is what these companies built over the last few decades.
Security
Security is a major concern for all software companies. Security breaches happen on a daily basis, and with the rise of more friction in the world, private and government-sponsored hackers are out there to cause harm and collect precious data. Because of this, Security goes hand in hand with trust.
We all know that AI likes to hallucinate sometimes, and I hope that it doesn’t do the same with code.
Accountability
The person making the purchase decision at the customer (could be the CIO) has a strong incentive to keep his job, and the old quote carries some meaning:
Nobody Ever Got Fired for Buying IBM
Even when IBM products were not the most innovative ones, it was the sure thing to buy. Nobody questioned the decision maker if he went with the popular choice. If his choice of an unknown software blew up, however, he would face serious questions and the not-so-voluntary choice to look for a new job.
Bugs & new features
It is one thing to replicate or build software. Bug fixing and new feature development are constant ongoing tasks without which a software company does not survive. Adobe, Salesforce and Co have shown that they have great product managers, who deliver new features on a regular basis (even if many customers are not happy with the speed of innovation).
Could the incumbents benefit from AI?
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