SaaSpocolypse. SaaSmaggedon. Wall Street loves its cute monikers to describe market action, especially at the extremes. But rumors of the demise of the software sector have been greatly exaggerated. At least, that’s how we see it.

It is true that the software sector and the software as a service (SaaS) business model is in a bear market. The numbers cannot be disputed. The S&P North American Expanded Technology Software Index, as one proxy for the sector, has declined roughly 16% since the beginning of the year (as of early May). That rapid sell-off has alarmed investors.

Previously, Wall Street analysts seemed mostly enamored by the subscription-based SaaS model. It offered customers all the benefits of on-demand access to software—easy installation, automatic updates, access to maintenance expertise, and the ability to scale quickly—all for lower costs and fewer headaches compared to using internal resources. In return, SaaS companies got attractive and durable revenues, as well as a long runway for potential growth. What’s not to love?

But suddenly, Wall Street’s thinking shifted. The culprit, not surprisingly, was a popular villain—artificial intelligence. The argument was that GenAI’s programming potential (and soon Agentic AI) would completely upend the industry and disrupt the embedded advantages of this business model. Investors feared that writing code would become virtually free, and companies would eschew SaaS relationships and insource to build their own software solutions. Investors, as they are often prone to do, seemed inclined to sell on the rumor and ask questions later.

Disruption Creates Opportunity

We find this herd behavior perplexing and think the current price dislocation across many (though not all) software names is creating potential opportunities. For starters, we don’t see much change in earnings projections across the sector at present. Fundamentally, growth rates continue to look solid. Rather, what has punished these stocks is a shift in sentiment that has compressed earnings multiples.

Moreover, let’s remember that software has faced its existential demons in the past. The emergence of open-source code was once feared to cause the collapse of software sector in 1990s, yet the industry has enjoyed robust growth ever since. The government once aimed to roll out simple and free tax software for the masses, yet that didn’t even dent the tax preparation and accounting business. Linux certainly does not dominate the desktop world today. And we don’t think the enterprise software business will become extinct tomorrow.

AI will write excellent code—it already does. But in reality, writing code has been cheap for years, and access to “free” coding from AI will not solve customer problems on its own. The true value proposition from SaaS companies is the non-code part of equation. Software consumers want an easy way to consume and leverage their application in meaningful ways. They want partnership and support, and they want the software to evolve with the times in ways that continually make them more efficient (i.e., profitable).

AI is a disruptive force and will require many business models to evolve. But we do not see it obliterating the need for enterprise software.

Moreover, we think it’s worth pointing out that SaaS companies have grown up in a fast-changing tech world. The best management teams leading the best software companies should be quite adept at evolving and repositioning for success. Of course, not everyone can win, and that’s why we prefer fundamental research versus allocating indiscriminately to an index. Thus, we embrace the disruption and seek to acquire the best positioned companies at the best value, and that may include software in the right circumstances.