AI's Impact on Software Industry Sends Shares into Slump

Shares in software companies are down due to the rise of AI tools that can write and develop code, potentially disrupting the software industry's SaaS business model. Investors say AI could upend the way businesses operate, with shares in Salesforce, Adobe, and Atlassian down 26%, 19%, and 30%, respectively, this year.

The software industry is experiencing a significant shift as artificial intelligence (AI) tools gain the ability to write and develop code. This new capability is potentially disrupting the traditional software as a service (SaaS) business model, causing investors to reassess the valuations of major players like Salesforce, Adobe, and Atlassian. Shares in these companies have fallen by 26%, 19%, and 30% respectively this year, reflecting the growing concern over AI's impact.

Marc Andreessen's 2011 essay, "Software is Eating the World," predicted the rise of software companies. However, the current landscape is changing rapidly, with AI tools threatening the dominance of traditional SaaS providers. Companies like Salesforce and Adobe, which have been valued at $236 billion and $150 billion respectively, are now facing competition from startups leveraging AI to create more specialized and efficient tools.

The SEG SaaS Index, which tracks the performance of over 100 SaaS companies, shows a decline in growth rates. While these companies grew by more than 20% in 2021 and 2022, analysts predict an average growth of only 9% for this year. The pandemic-era boost to corporate software spending has proven to be short-lived, and the introduction of AI tools by startups is further exacerbating the situation [1].

AI is prompting a shift in customer behavior, with companies increasingly opting for AI-driven solutions. For instance, Monday.com, a project-management tool provider valued at $9 billion, experienced a 30% post-earnings stock drop due to AI-driven competition. This trend is not confined to smaller players; even established companies like Adobe face challenges from AI tools developed by Alphabet and OpenAI [1].

Valuations of SaaS companies have not fully absorbed the AI threat. The median forward revenue multiple for the SEG SaaS Index is 4.3, while the mean is 5.3, indicating that the market is not yet fully aware of the potential impact of AI [1]. However, the transition to usage-based pricing models, such as "Flex Credits," could introduce more volatility into the traditional SaaS contract model, potentially making valuations more uncertain [1].

Investors are right to be cautious. While AI presents significant challenges, it also offers opportunities for companies that can integrate these technologies effectively. The key for SaaS companies will be to adapt and leverage AI to enhance their offerings and stay competitive in the evolving market landscape.

References:
[1] https://www.reuters.com/commentary/breakingviews/ai-will-take-bite-out-software-valuations-2025-08-22/