Software stocks have faced significant challenges this year, driven by investor concerns that artificial intelligence (AI) could fundamentally disrupt the software-as-a-service (SaaS) industry. This apprehension has led to widespread selling across the sector, with many SaaS companies experiencing declines in their stock prices.
The bear case against software stocks rests on three main arguments. Firstly, there is a belief that AI will reduce workforce requirements, potentially leading to decreased revenue for SaaS companies that typically base their subscription pricing on the number of users accessing their platforms. Secondly, the rise of AI could enable organizations to create custom software more easily, allowing them to circumvent reliance on third-party vendors. Lastly, some industry observers speculate that large language model (LLM) developers, such as Anthropic and OpenAI, may aim to eliminate the software layer entirely by integrating AI directly into their offerings.
However, these concerns may be overblown. SaaS models are likely to evolve, shifting from a seat-based pricing structure to a consumption-based model, which could address the first concern regarding reduced workforce requirements. Moreover, while front-end software development has become increasingly accessible, many organizations are hesitant to take on the burdens of maintenance and governance, recognizing the associated costs and risks.
Furthermore, rather than eliminating the software layer, AI is expected to enhance its significance by improving how organizations leverage AI to boost efficiency and drive growth. AI relies on structured data, and the software companies that possess and manage this data are crucial to its effective application. While some SaaS companies may struggle to adapt, those that have established strong competitive advantages through proprietary data and complex workflows are likely to endure.
One such company is ServiceNow. Despite a 25% decline in stock price this year, ServiceNow stands out as a promising investment opportunity following the SaaS sell-off. With its market capitalization at $115 billion and a current share price of $110.42, the company is tightly integrated into its customers’ workflows, linking data across various departments, including information technology, human resources, and customer service.
ServiceNow has actively embraced AI to drive growth, with its generative AI suite, Now Assist, witnessing its annual contract value rise to $600 million by the end of the last quarter, with expectations to reach $1 billion by year-end. This growth is contributing to an overall revenue increase of over 20% for the company. Additionally, ServiceNow aims to lead in agentic AI orchestration through its AI Control Tower, enhancing its capabilities in managing permissions and asset visibility, which are becoming increasingly vital in an AI-driven landscape.
ServiceNow’s strategy includes recent acquisitions of AI cybersecurity firms Armis and Veza, further solidifying its position in managing rights permissions and asset visibility. These developments suggest that the company is positioning itself for future growth as agentic AI continues to evolve. In a market where many SaaS stocks are struggling, ServiceNow appears poised not only to survive but to thrive in the evolving technological landscape.
As investors weigh their options in the current market, ServiceNow’s focus on integrating AI into its offerings presents a compelling case for potential recovery and growth in the coming years. With its established market position and innovative strategies, ServiceNow could emerge as a leading player in the AI-driven future of the SaaS industry.
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