Key insights
- The author believes AI fears have negatively impacted SaaS stocks despite strong revenue and negative churn. ServiceNow's earnings are key to gauging sector sentiment. Bullish signals include strong outlook, revenue retention/growth, and a robust new product pipeline. A bearish signal would be churn rates rising above 0% for the SaaS sector.
AI scare has completely taken out the premium out of SASS stocks for their predictable revenues as they now require innovation to stay ahead of the curve.
However, Revenue figures for all Sass companies are actually up, so is revenue per user and churn remains negative (meaning existing customers continue to use more).
On the flip side there is tremendous pessimism about software stocks. It is assumed software will make it easier to build software that will either replace with custom internal builds or lower barriers to entry and make it cheaper.
I disagree. I believe that AI will help elite level founders (for those still in charge) build even better products faster, leveraging the data and customer base that these businesses have at scale (which would require a startup mentality). I think it is overblown how much churn will be and I doubt it ever turns to below 100% for the sector as a whole of publicly traded SASS (that’s what would convince me of a bearish trend, seeing churn appear)
ServiceNow is reporting today after the bell.
What would it take in earnings to make you bullish about the sector again or confirm you Bear thesis?
I’m looking at outlook, revenue retention/growth, retention levels from existing clients and new product pipeline.