Hot take on SaaS apocalypse

Ironically making a post about SaaS stocks... because I'm sick of seeing the exact same posts daily.

Honestly, I see all these discussions about Microsoft, Accenture, Adobe, and ServiceNow right now. And as much as I agree that the recent selloff might be overdone, things can still get a whole lot worse before they get better, and I don’t think everything is as undervalued as people make it out to be.

I’m saying this as someone who actually has skin in the game - I've got 7% of my portfolio between Microsoft (5%) and SAP(2%) - flat on MSFT and down 13% on SAP. I WANT these stocks to do well. But the fact of the matter is: the market doesn’t care about my or your feelings.

The market doesn't care if you think a single digit P/E is unjustified for Accenture, or that Adobe is buying back a massive 1/4 of the company through buybacks. People see MSFT at a forward P/E of 20 and think it's a steal. So what? It can go to 18 or even 15. Or 20 can be the new norm? These might be solid companies, but just look at something like Charter and Comcast. People thought a forward P/E of 6 and 8 was insanely cheap, and now we’re sitting at a 3 and 5 with "only" a slow, single-digit decline.

Now, you can argue that the quality of Charter's business is different, but what about PayPal? It is literally still growing, and look at it. Same exact thing - the market doesn’t care and it hasn’t for the last 2 years. And the market can continue to not care for a very long time, neglecting a company way longer than you can stay solvent.

For the people arguing that companies like Accenture are fine because they are still growing - possibly, but the risk is still here. Honestly, do you really think these massive companies can grow double digits into the next decade? I’m not talking 2, 3, or 4 years from now. What about 10 years out? And do you really think consulting clients are just going to pay the same premiums knowing full well Accenture will use AI tools reduce workloads and drive down costs? Or perhaps even opt to in house more services, even if it’s just a tiny fraction. Many see AI as a pure tailwind, and I believe customers might start expecting way more for their money too soon. Even a slight reduction in margin means those forward P/Es under 10 can get less attractive very quickly…

MSFT is also not the bargain deal of the century. They are a solid company with great fundamentals, but there is genuine uncertainty for the long-term outlook. There is massive execution risk here. AI is a double-edged sword. Time will tell if they can properly charge per seat for Office + token-based usage, and with exploding AI infrastructure costs, will their margins really stay the same? I believe they’ll navigate this uncertainty well, but I’m also not increasing my position until I see more clarity or a far worse selloff. Fact of the matter is, a PE of 20 really isn’t as cheap as people make it out to be. It’s fair value in my eyes.

Same thing with Adobe. There is huge execution risk in changing their pricing model, they face more competitors than ever, and even though I’m sure they’ll remain the standard for editing, they have to invest into AI tools just to stay competitive. There is real uncertainty about how that affects margins long-term, despite what bulls believe. I have this company on my radar, but there needs to be a bit more clarity for me. Also management throwing money out the door with 25B in buybacks instead of improving the product doesn’t give me vote of confidence.

Stop looking at trailing metrics and assuming a "cheap" P/E means a bottom. The macro environment has changed, and a company being great doesn't mean its stock price can't drop another 20%. Add SBC and numbers also look a whole lot different. Consider that margins have a huge impact on that PE, a couple hundred basis points can make a huge difference for these SaaS and consulting companies, question is which ones really have pricing power and tailwinds, which of these do you believe can actually keep their pricing power and try to look further ahead than next years guidance to decide if that pricing power / growth is actually sustainable, and if you believe it’ll slow down, will it really only slow down? Or is it possible to start seeing churn. Or even if growth stays at single digit, what happens when margins go from 40% to 30%? That PE will look far less intriguing

Overall I get that people are bargain hunting, but it’s really not as black and white as some make it out to be and there are real risks and reasons these companies are dropping and dropped. Now the real question is finding those companies which have the pricing power and bring enough value in the long run.