AI Revolution Reshapes Software Industry: Citigroup Predicts Divergence and New Champions

The software industry is currently experiencing a seismic shift as artificial intelligence challenges the established SaaS (software as a service) business model. Citigroup analysts Tyler Radke and Fatima Boolani, in a report released on September 2, argue that AI will not simply end the SaaS model but will herald a "winner-takes-all" era of significant market divergence, where a few high-growth winners emerge while many lag in growth.

Despite widespread concerns about AI's disruptive impact, which has exerted pressure on software stocks, Citigroup suggests that the market reaction might be exaggerated. The risk, however, is tangible, especially for application software companies reliant on a "seat-based" pricing model.

AI is set to create a divide, leading to a substantial valuation gap among software companies. Since 2022, companies with a growth rate exceeding 20% have seen their enterprise value/revenue (EV/Revenue) median valuation nearly double to 11.7 times, whereas those with growth rates below 10% see stagnation around 4.9 times, reminiscent of the SaaS downturn in 2016.

Citigroup has introduced an "all-weather AI investment portfolio" that includes firms like Microsoft, MongoDB, and Snowflake.

Citigroup's analysis outlines three potential scenarios for AI's impact on current software providers, ranging from disruptive to empowering outcomes.

In a pessimistic scenario, advancements in AI and large language models (LLMs) could make creating custom applications exceedingly easy, thereby challenging existing software providers. This is particularly concerning for companies using seat-based models like Adobe, Salesforce, and others. Conversely, cloud computing giants and data infrastructure companies, such as Microsoft, MongoDB, and Snowflake, are poised to benefit significantly.

The base case, considered most probable by Citigroup, suggests that existing leaders with innovation capabilities can effectively commercialize AI products. This would potentially offset the pressures facing the seat-based model, maintaining overall revenue growth. The major beneficiaries would still be cloud computing and data infrastructure providers.

In an optimistic scenario, software giants lead AI innovation, stimulating revenue growth through new product cycles. Even under pressure, these companies would transition to result or usage-based pricing models successfully, benefiting firms like Microsoft and Salesforce.

The market has recognized the winds of change, pricing future winners and losers accordingly. Data indicates severe valuation divergence among software companies.

By August 26, 2025, companies with growth rates exceeding 20% had a forecasted sales ratio (EV/Revenue NTM) median of 11.7 times, doubling from 2022 lows. In contrast, those with growth below 10% had a median valuation of only 3.5 times. Free cash flow (FCF) valuation similarly reflects this trend, with high-growth companies showing a forecasted EV/FCF median of 56.2 times, starkly above the 16.0 times for low-growth firms.

This analysis draws a parallel to the 2016 SaaS downturn, where market fear over slowing growth and business models led to valuation collapses. Citigroup notes that while overall valuations haven't reached those historical lows, pressure is concentrated on low-growth groups, while high-growth companies maintain or expand their premium.

Citigroup's strategy identifies 12 companies in their "all-weather AI basket" that show competitive resilience across potential market scenarios.