Will AI Destroy the Software Industry?

0:04Tyler Crowe:Tyler Crowe, Making sense of the situation in SaaS stocks. This is Motley Fool Money.

0:20Tyler Crowe:Welcome to Motley Fool Money. I'm Tyler Crowe, and today I'm joined by longtime Fool contributors Matt Frankel and Jon Quast. So a few of us are going to be at a Motley Fool member event and we'll be a little bit of traveling. So we're pre-recording this episode, but we're going to do a special episode where we're going to answer a listener question that we realized we couldn't do in a single segment and we wanted to do a whole show about it. And it's, of course, about SaaS companies or software as a service. So we got a question a couple of days ago from Scott Pounders, one of our listeners, and he asks, I own quite a few SaaS companies in my portfolio, SaaS meaning software as a service, that have been hit hard due to the AI revolution.

1:02Tyler Crowe:Some have seen obvious that they can survive with AI. Could we do an episode in which popular SaaS companies are most vulnerable to AI? I'm looking at particular companies, HubSpot and Constellation Software. So before we get too deep, I want to set the stage here of SaaS companies, why Scott is so anxious about this particular topic. Because I don't want to assume everyone listening knows exactly what's going on with SaaS companies and kind of the disruption that we're seeing with AI. So, John, how about you kind of set the stage here for what Scott is asking for everyone else?

1:44Matt Frankel:Yeah, absolutely. I want to speak to that, Tyler. First, I do want to speak to SaaS companies in general and why investors have really loved these stocks historically. I think there are two reasons why these have been well-loved. They're just really good businesses. The first way that we see that is these companies offer a software product suite. This means that usually these companies have high profit margins. And if it can get a customer, it can then start selling these bolt-on software products with very little incremental effort. And so that just boosts the revenue. Much of it drops straight to the bottom line.

2:27Matt Frankel:Very attractive financials, generally speaking, in the SaaS industry. The second thing is that these companies usually have a recurring revenue model. So once you get a customer, they buy from you basically every month. And that's very different than, say, a Whirlpool, right? Whirlpool might sell you a washing machine and you might love that washing machine, but you're not going to buy another washing machine next month. It's going to be a long time. Whirlpool is doing a one-time sale and done kind of a business. A SaaS business, it's a recurring revenue model. That's a great thing to have. High margin, recurring revenue.

3:04Matt Frankel:Here's the problem. They could be disrupted by artificial intelligence. A couple of skilled AI prompters can create software products that do what some of these SaaS companies do, and they can do it in just a matter of days. Investors are understandably scared about this. And we can look at the sentiment with an ETF, an exchange-traded fund called the iShares Expanded Tech Software Sector ETF, ticker symbol IGV. This ETF owns a lot of SaaS stocks. Over the last six months, it's dropped over 30%, whereas the NASDAQ is only down about 9%. That shows us directionally investors are running away from SaaS companies.

3:48Tyler Crowe:As we look at this, as you said, it's starting to show up in companies, like you said, in this ETF. For a lot of the part, it's happening mostly on valuation. We haven't really seen a whole lot of, I would say, tangible evidence of it across the entire SaaS universe. But there are some isolated examples. And Matt, maybe you could walk through maybe some of the core examples of companies that actually have been disrupted by AI so far.

4:20Jon Quast:Yeah, well, I mean, the online homework, help, and tutoring platform, Chegg, is probably the most extreme example of this so far. The stock is down by 99%, not even misspeaking, down by more than 99 % since peaking in 2021. Essentially, free AI tools that are available, like ChatGPT, have literally replaced its core product. Even Google, since it shows AI right in search results, it's done that. Revenue is falling by 40 % year-over-year right now. Traffic from its users is dropping even faster. But with most of the stocks that we're covering, including the two that were mentioned by the listener, that have been beaten down, nothing has really happened yet except investor fears.

5:05Jon Quast:It's estimated that more than$2 trillion in market cap has been wiped out by SaaS businesses in the first quarter of 2026 alone. But some of the most vulnerable businesses that we'll get in a minute, are still seeing revenue climb and more businesses adopt their platforms. I mean, for example, ServiceNow's stock has dropped over 50 % over the past year, despite growing subscription revenue by more than 20%. Datadog is down nearly 40 % from a tie, and bookings surged by 37 % year-over-year in the latest quarter. Adobe is another one that's trading for roughly one-third of its historic price earnings valuation.

5:45Jon Quast:Now, I'm not saying that these companies aren't going to be impacted by AI. But in a lot of cases, so far, there's a disconnect between the stock performance and the actual business results we're seeing from a company.

5:58Tyler Crowe:Let me go in a little bit of a scenario planning situation for investors, and I'll direct this back to you, Matt. So spelling out kind of the best case, worst case scenario here, As you're looking at the space, what is the doom and gloom scenario for SaaS companies? And what is the Pollyanna, hey, this is probably good for us sort of situation? Yeah.

6:22Jon Quast:The worst case scenario, simply put, is that AI renders a lot of these SaaS businesses essentially worthless or at least a lot less useful than they are right now. Like I mentioned a minute ago, we're already seeing signs of disruption in a few popular SaaS businesses, but not many. But, for example, it would be terrible for companies like Atlassian if AI just allowed businesses to simply code their own workflow automation. But it's important to note that even in a worst case, most SaaS businesses, they wouldn't go to zero. It's just some of their highest-paying customers could either take a DIY approach or need fewer seats or something like that.

7:00Jon Quast:The best-case scenario would be that AI ends up being a lot more of an advantage than a threat to these SaaS businesses. And several industry experts, including Jensen Huang, the CEO of NVIDIA, recently said that the market got it wrong on SaaS. He believes that AI agents won't replace enterprise software, but the agents themselves will use the tools, specifically called out ServiceNow, Cadence, Synopsys. But his logic could apply to most of the SaaS companies we're talking about. Not Chegg, obviously.

7:32Tyler Crowe:Yeah. Unfortunately, I think Chegg might end up being the punching bag that we talk about the most today when it comes to this topic. After the break, we're going to talk about some of the ones that we don't think are in much trouble. We'll also get into some of the ones that we really think are in trouble. But before we do, I really want to make sure that we get Scott's question answered here because he was specifically asking about HubSpot and Constellation. So John, running the gamut of SaaS companies today, where do you see HubSpot and Constellation kind of landing on that spectrum of, hey, it'll be okay versus this, these companies are absolutely doomed?

8:10Matt Frankel:The truthful answer is, I don't know. You look at a business like a HubSpot, you look at something like a Constellation software. So HubSpot, this is the customer retention management platform and marketing sales, all that kind of stuff, you can make a very good case that AI can do this well. And the same thing with Constellation, it owns so many different software products that it's logical that at least some of them can be replicated with good AI coding. And so I understand the fears when it comes to those two businesses. And I would understand if an investor would take an outside look and be like, you know, I'm a little bit nervous here.

8:49Matt Frankel:Again, though, I will circle back to something that Matt did say. There's a case where Chegg is already seeing the disruption, but there are many businesses, and these two are included, where it's fear, but AI is not eating the lunch yet. Both of these companies, you look at their trailing 12-month revenue, both are at all-time highs. You look at free cash flow, both of these companies are at all-time highs. The only thing that has changed so far for Constellation and HubSpot is the valuation. Right now, Constellation trades at three times sales. It hasn't been this cheap since the great financial crisis.

9:28Matt Frankel:HubSpot wasn't around back at the great financial crisis. It actually trades at its lowest valuation ever since going public at four times sales. So it has had a huge reversal in the valuation. So remember what I said at the outset. These are great businesses, great margins. So they enjoyed very high elevated valuations. And now investors are like, there's no future here. And so they've gone completely the opposite direction. Maybe the pendulum has swung. If investors are right, right now, investors are saying that Constellation and HubSpot don't have a future. If investors are right, then we will see that show up in the financials.

10:06Matt Frankel:And it's only a matter of time. But if investors are wrong here, these two SaaS companies, if they can thrive in the age of AI, then this is a fantastic contrarian opportunity here. But it really depends on how you see it specifically for these two. I don't know personally, so I would stay on the sidelines personally.

10:24Tyler Crowe:Even though SaaS is a unique business model, there is obviously a very wide gamut of possibilities of companies that are using this particular business model to do what they do. And so after the break, we're going to kind of dig into some of the companies that are on our radar as potential victims of disruption.

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11:49Tyler Crowe:As I was saying before the break, there is a lot of options when it comes to SaaS. It isn't necessarily a type of business. It's a way that a lot of software companies have modeled their businesses today. But as we're looking at potential companies, parts of the SaaS universe that are going to be disrupted by AI, I wanted to toss the question to both of you. As you're looking at the AI revolution, maybe it's not just that AI can displace what they do, but maybe it's also the businesses to which they're selling could be radically different, and that could result in big problems for these particular companies.

12:28Tyler Crowe:So as you're looking at the entire SaaS universe right now, I'm going to start with you, John. What is one company that you're really looking at closely as a potential victim of the AI disruption?

12:46Matt Frankel:Yeah, I'm worried about Asana, ticker symbol A-S-A-N. Generally speaking, workplace or enterprise productivity or workflow software. You know, I never really found that whole genre personally very useful. And I think it's even more in danger now. It seems like AI really is coming in here and providing a lot of tools and making a lot of this software less useful or perhaps more obsolete. Look, Asana, when it comes to this space in general, if we zoom out, Asana is one of the smaller companies. It's smaller than many of its competitors. and even though competitors are bigger, they have superior growth rates.

13:28Matt Frankel:That's already a problem. And you look at Asana's net retention rates, they've already dropped below 100%. And so, this basically means its existing customer base is spending less money now than it was last year. The company has a pay-per-seat business model. And if you think about this big picture, Let's say that AI comes in and makes companies more efficient. They need less tech workers because existing tech workers are using AI tools and they're becoming more effective at what they do. That turns into fewer seats needing Asana's technology. And Asana is a pay-per-seat platform. And so just thinking about how AI could disrupt it even there, just by making its customers more efficient, those customers would have fewer seats than to buy from Asana.

14:17Matt Frankel:And I think that that's what we're already seeing playing out in the numbers for Asana. It seems like it's a declining opportunity. It already seems like it's one of the weaker players. So, yeah, considering all these things, it does seem to paint a bleak outlook for Asana and its shareholders.

14:33Jon Quast:I went in a very similar direction. and it's a company whose products I've actually used three times so far today. It's a company that I enjoy their products. I find them very useful, but I have to call it Atlassian here. Ticker symbol is Team, T-E-A-M. If you're not familiar, this is the company that provides the Jira workflow platform. They have other tools like Confluence, both of which I use regularly. In this case, it's not necessarily that the product itself will be replaced by AI, John alluded to this. It potentially could, but that's not the primary concern. The primary concern is that pricing model.

15:11Jon Quast:John mentioned the pay-per-seat model. It's not just employees are going to become more efficient, you're going to need fewer employees. That's absolutely the case. But like Jensen Huang said, with AI agents potentially using these things themselves, can you really charge a seat license if a company has 10 AI agents working on you that, you know, that's not 10 seats. Atlassian, they charge subscription fees on a per seat basis. If the humans that use the product are replaced or supplemented with a bunch of AI agents, well, like I said, AI agents don't need a seat license. So, if agentic AI allows a company to function with 100 seat licenses instead of 300 while accomplishing the same amount of work, it's bad for business, even if the platform is just as useful as ever.

15:58Jon Quast:Even if Atlassian does a great job of incorporating AI functionality into its platform, if its customers need fewer seats, it's a losing situation. Now, to be fair, in its most recent quarter, Atlassian had 23 % year-over-year revenue growth. Some of this is fear at this point. But for the first time ever However, in its history, Atlassian showed a decline in its enterprise seat counts. That is a big, alarming thing for shareholders. It's one of the reasons why the stock is plunging. I'm not surprised to see a negative reaction. I'm not going to count them out just yet, but I've said before, there are some SaaS companies that should be worried.

16:45Jon Quast:The workflow productivity software companies like the two that we just mentioned, And there are two of them.

16:51Matt Frankel:I think that that's such an interesting fact there, Matt, and a reason why we should kind of circle back to why did we kind of go in the same direction here? It's because these two SaaS companies, they have the same revenue model. And I think we should point that out for our listeners, that just because something is a SaaS stock, not all SaaS stocks are created equal. There are different billing methods. There are different revenue models. There's usage-based models, et cetera. So the pay-per-seat models, especially for more a tech-facing software product, that would be something that I would look at with a little bit of suspicion, a little bit of worry in this age that AI is coming in and changing things.

17:34Matt Frankel:If it's a pay-per-seat model, that's something to look at cautiously.

17:38Tyler Crowe:You know, I'll take that even one step further, too. Not only is it just like the seat license sort of thing. I think what also it lays bare is the idea that the current business model doesn't work on a per person basis. Maybe it starts to get down to like a almost like a metered usage sort of basis and would actually kind of fundamentally change the way that a lot of these businesses are charging how they work. Just thinking out loud right now, Claude, for example, you know, you have you burn through tokens as like sort of a usage sort of case. I would not be surprised to see if companies that are staring down this thing where it's like, yeah, we know that they are using fewer seats, but because they're using AI agents, they're actually using our product more, that they start to go to some sort of token usage-based sort of model that is more reflective to a business's actual use case versus the per-person basis for it.

18:40Tyler Crowe:So perhaps something to watch in the coming years as we see these businesses evolve in the AI. Coming up next, what we think are the real survivors in this AI disruption era. This time of year always makes me rethink what's in my closet. I'm trying to keep fewer things, but better ones. Pieces that are well-made and easy to wear all the time. That's why I keep coming back to quince. The fabrics feel elevated, the fits are thoughtful, and the pricing actually makes sense. And as the calendar has moved from winter to spring, items like their men's linen pants and shirts are perfect. Lightweight, breathable and comfortable, striking the right balance between laid back and refined so you look put together without trying too hard.

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19:57Tyler Crowe:Go to quince.com slash motley for free shipping and 365 day returns. quince.com slash motley. Hey, just a reminder, you know, we're doing this particular pre-recorded show because we are getting questions from our listeners. And we want to love to hear from you as well. So if you have a question for Matt, John, myself, anyone else on the team, maybe you want us to do a deep dive on some other topic. Or maybe you have a little bit more of a one-off. Hey, what do you think about this stock? We'd love your questions. We like doing segments. We like even doing these full types of shows available on listener feedback.

20:32Tyler Crowe:We want to hear from you. So please, if you want to get your question answered on the air, send us an email at podcasts at fool.com. Just our one request is always keep it foolish. That email again is podcasts at fool.com, podcasts at fool.com. All right. So we're going to go around the horn again. And instead of looking at what we say the highest likely victim of being in the AI world, I want to think of the survivors. What are the companies that you think, based on their current business models, are, I wouldn't say set up to thrive necessarily, but set up to weather the storm relatively well in the world of AI?

21:13Jon Quast:Well, I would say thrive for a couple of them. So, I'm not sure how popular this opinion is right now. But I do think that the cloud-based cybersecurity companies, specifically Zscaler and CrowdStrike, ticker symbols are ZS and CRWD, are set up to thrive in an agentic AI world. It's not as much of a threat to these businesses as it is a tailwind, and it's being perceived as a threat to both of these just based on their stock performance. So, for one thing, the global cybersecurity market is expected to roughly triple over the next seven years. And although AI is widely expected to do a lot of the things that these platforms do, like identify bugs in software and threats that we already know about, it also can create new threats that will need to be dealt with.

21:58Jon Quast:Malicious prompts are being inserted into LLMs right now. Magentic AI will be able to create its own malware. And it can do it quicker than threats were being developed before. An AI-native solution like CrowdStrike in particular is in an excellent position here. And so is the zero-trust access that Zscaler provides. It's going to be so much more important to its enterprise clients than ever. CrowdStrike's management has even called AI the largest opportunity in cybersecurity yet. And the company's revenue growth is expected to accelerate this year. Zscaler is in a similar position. I mean, management has quantified this by estimating that securing agentic AI operations is a$19 billion untapped market opportunity just by itself, not including whatever else they do.

22:47Jon Quast:So, with both companies, there's also the trust factor. People trust these companies. The majority of the S &P 500 uses these two platforms. Assuming that both companies are able to keep up with the ever-evolving landscape of threats, they're in a great position to keep growing. And Zscaler and CrowdStrike, they're down by 60 % and 30 % respectively from their recent highs. And I think this is a massive overreaction by the market.