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SalesForce (CRM) reported weaker-than-expected earnings on Thursday, leading to the stock's biggest one-day decline since 2004. It's the latest in a string of disappointing earnings this season across the board. from B2B SaaS companies.
During this quarter, almost the entire B2B SaaS industry reduced forecasts or disappointed investor expectations, including Asana (ASAN), Atlassian (TEAM), DataDog (DDOG), Snowflake (SNOW), Twilio (TWLO) and Workday (WDAY).
It's not (yet) AI
“Software is eating the world,” venture capitalist Marc Andreessen said in a 2011 opinion piece in the Wall Street Journal. What followed was a long wave of Software-as-a-Service startups that crushed large incumbent software companies, leading to some of the most successful IPOs of the last business cycle.
However, recently, speculation has been growing that large language models (LLMs) pose a threat to the entire software ecosystem. In an aptly named short essay titled “The end of softwaresays venture capitalist Chris Paik of Pace Capital, which can significantly reduce the cost of developing and maintaining software, leading to a proliferation of new agile software solutions that could replace traditional SaaS models.
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Paik says this shift could lead to a fundamental overhaul of how software is created, sold and consumed, potentially rendering existing B2B SaaS business models obsolete as the market shifts to AI agents. He goes so far as to say: “A major in computer science today will be like a major in journalism in the late 90s.”
There's no doubt that GPT and Github's Copilot are already proving useful to software engineers. However, Paik and others in the “AI eats everything” movement likely underestimate the difficulty of the task. In a world where LLMs struggle with basic math, reasoning and hallucinations, this certainly seems far-fetched.
In a thread on . AI can increase productivity, automate a number of tasks, but assisting (to the point of full automation) is a huge leap of faith.
Das goes on to say that software job growth is slowing due to several factors, including over-recruiting and, ironically, the efficiencies created by software. But, according to Das, the cause is definitely not “AI taking over software.”
Spreading the benefits of AI
One of the key promises of technological innovation is that benefits accrue to everyone as adoption increases. Software and SaaS companies that adopt and integrate AI the fastest will be the first to reap the rewards, leading them to create even more valuable features for their customers.
In fact, we can already see this split emerging in the market, where agile, niche-focused B2B SaaS companies are thriving even in the face of broader industry decline. Companies like Appfolio (APPF), AppLovin (APP), Q2 Holdings (QTWO), and Zeta (ZETA) are starting to separate themselves from the pack as their earnings accelerate.
As more mature SaaS companies integrate and deploy AI, and more importantly, as they monetize it, they could see a return to higher growth.
Software problems are more commonplace right now
As Deedy Das suggested, the explanation for the recent decline in revenue and profit growth in B2B SaaS is more mundane. Companies overhired during COVID and laid off high-cost workers. According to the tracking website Layoffs.for infocompanies laid off 263,180 tech workers in 2023, followed by another 89,193 so far in 2024.
Most SaaS is priced at headquarters. Given that there is a direct correlation between downsizing and revenue, this easily equates to billions of dollars in lost recurring revenue across the industry. Indeed, one of the main advantages touted by SaaS companies was this ability to evolve as needed, without commitment.
Additionally, as macroeconomic conditions push companies to cut costs, these SaaS bills are finally coming under scrutiny. A few Surveys among CIOs have suggested that up to 30% of SaaS spending could be waste.
Meanwhile, the unemployment rate in California and Washington continues to rise, even as job postings for technical positions continue to decline from their 2022 peak. This suggests that without a large increase in the economic growth and hiring, the SaaS industry is unlikely to come back. to short-term growth.
Important Disclosure: The author is an active trader and investor and owns securities in some of the companies mentioned here. This article is for informational purposes only and does not constitute investment advice. The facts and figures cited may contain errors and should not be relied upon in making investment decisions. Trading and investing involve risk of financial loss. Always consult a professional before making any investment decision.