SaaS is dead. Long live the A.I. Wrapper.
A year ago, we predicted the end of SaaS. The premise was that A.I. tools such as ChatGPT and Lovable are making coding so cheap, software is becoming commoditised and corporations may be better off building their own proprietary tools than relying on “off the shelf” solutions that require a lot of time and effort to implement and adapt. Software companies choosing alternative business models over a SaaS strategy were a leading indicator at the time.
Now, the data is here to further backup this prediction.
1.) Revenue growth has continued to decline.
A year ago, there was still some cautiously optimistic hope that yoy revenue growth rate might stabilise between 15% and 20%. But since the start of 2025, it has continued to decline towards the 10% mark, largely due to a growing inability to convert new customers.
A continued decline of SaaS growth rates in Q1 and Q2 2025, driven by the industries struggle to win new customers.
As large corporations shift their IT expenditure away from buying off the shelf SaaS solutions towards experimenting with A.I., SaaS companies that rely on enterprise sales are also seeing sales cycles lengthening and deals not closing. The macro environment, marked by geopolitical tensions (e.g. Ukraine, the Middle East, U.S. trade wars) is adding another layer of growth-dampening uncertainty.
2.) Profit margin growth is not outpacing revenue growth decline.
As decades of prioritising revenue-growth above all else come to an end, the Rule of 40 mandates that SaaS businesses increase their profitability. Overall, we’re seeing more and more SaaS players turning profitable. But after almost 2 years of rebalancing profits and growth, the sector seems to be approaching the limit in terms of what profit margins investors can come to expect.
Slowing growth and limited profitability suggest structural headwinds for the sector, making it harder to justify premium valuations.
While a few SaaS firms (e.g. Salesforce, Adobe) have achieved EBITDA margins above 30%, most are not profitable even after a decade or more. Long-held promises of high future margins are not materialising as many companies are stuck in a limbo where they neither grow fast enough nor deliver consistent profits.
3.) SaaS is under-performing all major indices.
Slowing growth, limited profitability, A.I. disruption, and waning investor excitement suggest structural headwinds for the sector. But when tech’s former darling not only underperforms the new A.I. hype, but all other major indices, it’s time to tell “Houston, we have a problem.”
Investor excitement has shifted dramatically away from SaaS as traditional sectors like HVAC, utilities, and data center construction are outperforming SaaS firms. Even though SaaS companies tout A.I. features in earnings calls, markets are unconvinced. SaaS stocks are perceived as not being true A.I. plays.
Compared to November 2022, SaaS businesses (this excludes companies like Google and Microsoft for whom SaaS revenue accounts for a small portion of overall turnover) grew their valuations by only 17%. Far behind the S&P500 and traditional industries that are adopting A.I. technologies to boost their performance and sales.
Overall, SaaS looks like it is moving from a “growth” narrative to a “mature and slow” one. This makes it harder to justify premium valuations. But will SaaS businesses be decent “cash cows?”
Does SaaS have Cash-Cow potential?
Quo vadis, SaaS?
Is SaaS really dead?
A.I. is not just shifting investor attention, it poses an existential risk to SaaS companies. Many enterprise use cases previously dominated by SaaS (e.g. BI and ERP) are being reimagined using A.I. interfaces. As one SaaS CEO put it to me recently,
“It is very unlikely business analysts will be clicking their way through a SaaS product interface a few years from now. UX and interfaces will be irrelevant because all you need is a good A.I. agent to go through your data and return any piece of information or insight you need within seconds.”
This risks making existing SaaS products obsolete or less critical. Companies that fail to integrate A.I. meaningfully may be disrupted or sidelined. But while SaaS companies tout A.I. features in earnings calls, markets are not (yet) convinced. SaaS stocks are perceived as not being true A.I. plays, and the real value is seen in the infrastructure and services enabling A.I. development.
Still, while the broad outlook is sobering, the sector isn't dead (just yet). High-quality companies with low churn, emerging market opportunities, and A.I.-driven reinvention may yet thrive or transition into profitable “cash cows” if they maintain product stickiness and customer retention. ChatGPT’s recent expansion into consulting is indicative of the opportunities of “applied A.I.” ahead and SaaS companies with strong customer relationships and sector expertise will have a natural edge here.
So, what should SaaS companies do next?
In short, given still-high valuation multiples, founders of mature, decelerating SaaS companies are well advised to consider exiting while conditions are favourable. Many expect there to be an explosion of cheap A.I. developed SaaS solutions that will erode margins for everyone. It is just a question of time before the industry consolidates, so it is best to get in early. Keep in mind that churn, rather than industry vertical, will be the key determinant of company quality and valuation.
In contrast, high-growth or A.I.-first companies may be better off raising capital in order to scale fast.
