Chapter 1: What triggered the recent selloff in software stocks?
Welcome back to The Rundown for another weekend deep dive. Today, we are talking about the SaaSpocalypse. If you've looked at your portfolio lately, you might have noticed that your favorite software stocks are getting absolutely crushed right now.
In the blink of an eye, software companies went from Wall Street's favorite investment to being one of the worst performing sectors in the market right now, and it's all because of AI.
So in today's episode, we'll tell you why software companies and their business models had investors jumping in over the last few years, why that business model is now being threatened by AI, and if this sell-off is a massive overreaction or the beginning of the end. We got a great one for you today. Let's dive in.
Now, before we get into the numbers, let's talk about software companies, their business models, and how they became one of Wall Street's favorite investments over the last decade. We probably need to go back all the way to 2011. There was a famous op-ed in the Wall Street Journal from venture capitalist Marc Andreessen. The title of that op-ed was Why Software is Eating the World.
And in that op-ed, he predicted that software was going to disrupt every industry imaginable. And honestly, he was right. You fast forward to 2026 and we have thousands of software companies for all types of problems.
Today, businesses all over the world rely on software to handle very important things like customer relationship management, to payroll, down to very mundane things like booking a conference room. And some of these softwares are very niche depending on what industry you're in. There's specific softwares for dentist offices, construction companies, eye doctors, hospitals.
I mean, software really has eaten the world. Like how many times have you guys had a piece of software go down at work and it prevents you from doing your job? And these companies are called SaaS companies, which stands for software as a service. And investors love these companies for multiple reasons. For one, SaaS companies have an incredible business model.
They charge a reoccurring subscription to get access to their software. See, back in the day, you could buy software once, install it on your computer and use it as many times as you wanted. That's not the case anymore. Everything is a subscription and these software companies charge per user. That's been a fantastic business model. It's led to predictable and growing reoccurring revenue.
On top of that, the customers for these software companies are sticky. Once a company has a whole team using Salesforce or Workday or any software for that matter, switching to another one is a massive pain and it's unlikely to happen. But not only is the revenue reoccurring and sticky, the best part is the margins on these products are really high.
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Chapter 2: Why did software companies become Wall Street's favorite investment?
So back in 2021, software was trading at an extreme premium, but these days that multiple has collapsed. The forward PE for the S&P Software Index is now trading under 20 for the first time ever. There seems to be a huge shift happening when it comes to software companies. Wall Street is freaking out. So let's talk about why this is happening.
The sell-off in software has been absolutely brutal in 2026. I'm talking about one of the worst sector crashes in modern market history. There's an ETF, ticker symbol IGV, which tracks over 100 software companies. It's down over 20% this year so far. Some of the individual names are down even worse. Salesforce, Workday, ServiceNow and Intuit are all down more than 30%.
These are massive companies and they've lost over a third of their value in like six weeks. So what triggered this massacre? Well, it has to do with AI. See, investors are increasingly worried that AI is going to make traditional software products irrelevant. AI models and agents are getting very good.
The catalyst that really spooked Wall Street was when Anthropic, the company behind the Claude Chatbot, released a plugin in late January specifically designed to automate business tasks. They released one for lawyers that can review contracts, manage compliance, and do legal research. They released another one for finance research. Anthropic is releasing new tools constantly.
And that was kind of a freak out moment for the market because if an AI plugin can do the work of a specialized software, then maybe it might eliminate the need for that software completely. Beyond that, AI also threatens the SaaS business model. If AI agents start automating and replacing human workers, then these SaaS companies will have less users to sell to.
So that could mean software companies might have slower growth moving forward. And there's also fears that businesses might drop SaaS products completely and just use AI to build their own custom software to solve their pain points. One of the best use cases for AI is writing code.
There are tools out there now like Lovable and Replit that allow users to vibe code their own custom app using just a prompt without knowing how to code. Personally, I think that fear is completely overblown, but I'm gonna talk more about that later. I think the most valid bear case for SaaS companies though, is that they're gonna face increased competition from up and coming AI native startups.
AI allows for quicker software development with less people, and that could lead to newer, more nimble SaaS startups entering the space, offering a cheaper and better product to businesses. So existing SaaS companies might have to drop their prices to stay competitive, leading to lower margins.
So the risk facing these SaaS companies is slower growth and lower margins, and maybe even being completely replaced by AI. And that's why software companies have become a less attractive investment right now. Like I said earlier, the S&P 500 North American Software Index is trading under 20 times forward earnings for the first time ever. But the question is, is all of this an overreaction?
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