Not long ago, market commentators declared the death of software-as-a-service (SaaS). The rise of generative AI sparked widespread anxiety that traditional software incumbents would be disrupted overnight by AI-native competitors or users writing custom code on demand. However, as recent earnings results revealed, reports of the sector's demise were greatly exaggerated.
In the latest episode of Forager Funds' Stocks Neat podcast, Chief Investment Officer, Steve Johnson, and co-host, Gareth Brown, discuss why the "SaaSpocalypse" narrative is starting to unravel.
The initial sell-off hit software stocks across global markets, driving some high-profile businesses down anywhere from 40% to 80% off their peaks. Investors panicked that AI tools would instantly erode software moats, but the Forager team believed it was a market overreaction and leaned into this. Instead of fleeing the space, the team targeted entrenched businesses with crucial operational roles and low price points, such as accounting software platforms.
As reporting season kicked off, these software companies demonstrated renewed fiscal discipline by focusing on immediate cash flow and embedding AI features directly into their product offerings. Commenting on how the narrative is shifting back toward fundamental value, Gareth Brown noted:
"Each quarter is a point where I think the onus increasingly falls on the bears, rather than the people that are thinking this is good value, to prove their case."
This sentiment shift has triggered some rapid price recoveries. Website creation platform Wix.com (NASDAQ:WIX) - a new stock in the International Fund - has rebounded over 90% since late June of this year. UK-listed accounting giant Sage (LON:SGE) and engineering consultancy Tetra Tech (NASDAQ:TTEK) have similarly staged strong recoveries as extreme fears subsided. While Australian software names like Catapult have lagged behind their US and UK peers, the Forager team views regional valuation gaps and factor-driven market swings as ongoing opportunities rather than structural flaws.
Episode Highlights
- Setting the Scene: How fears of AI "vibe coding" and new AI-native competitors triggered the SaaSpocalypse sell-off across global markets.
- Separating Quality from Hype: Why deeply entrenched businesses with low price points offer the strongest defense against technological disruption.
- The Semiconductor Inversion: A look back at July’s market dynamics, where a sharp drop in semiconductor stocks coincided with a software short-covering rally.
- Profitability Takes Center Stage: How market pressures forced software management teams to curb lavish spending and prioritize bottom-line cash flow.
- Rebound Case Studies: Breaking down dramatic recoveries in global holdings like Wix, Tetra Tech, and UK accounting software provider Sage.
- Regional Lag in Australia: Why local tech stocks like Catapult (ASX:CAT) have been slower to participate in the global software rally.
- Where to From Here: Strategy updates on taking profits after securing the first wave of "easy gains" off the market bottom.
While the long-term threat of AI disruption remains a topic for ongoing scrutiny, Steve and Gareth emphasise that disciplined stock selection and valuation metrics remain paramount.
The initial wave of fear provided rare buying opportunities in high-quality tech businesses, but managing risk as prices normalise is the next key step.
To hear the full discussion, tune in to the full Stocks Neat podcast episode.
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