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"No one is going to leave because they have all their data stored there."
Friends,
That quote comes from a recent discussion I (Stoffel) had with someone who helps install legacy software-as-a-service (SaaS) systems in the United States.
He was addressing the fears that have gripped the software industry and sent shares of said companies plummeting: the ability of tools like Claude's Cowork and OpenAI's Frontier model to do what legacy SaaS can at a fraction of the cost.
And you know what? I genuinely believe my friend is right. Most big companies using legacy SaaS aren't going anywhere.
Those invested in SaaS stocks (myself included) look at quotes like these and think to ourselves: "This is all overblown. Software companies are a steal! I'm going to buy more!"
But that might be a fatal error.
Here's why:
Google, Facebook, Netflix, Tesla, and Palantir have a combined value of over $7 trillion. None existed in 1996.
Not only do we expect the same phenomenon (new companies quickly dominating a landscape) to be true in the future, but we think it could actually accelerate.
That means tomorrow's most important companies are being born today. And when those companies need to choose software as the backbone of their technology stack, they aren't beholden to the same SaaS switching costs as today's giants.
Simply put: the moat around today's SaaS giants protects their existing customer base, but does little to attract future customers.
And here's why that matters: two years ago, it would have been completely reasonable to assume that Salesforce could grow revenue at 10% annually over the next decade, with a 3% terminal growth rate. Assuming stable 30% FCF margins, that would make it a $319 stock today -- criminally undervalued.
But now, growth estimates are lower -- in the 7-9% range over the next few years. With a more dour outlook, it's reasonable to lower the terminal growth rates to 1% and FCF margins down to 25%. When that happens, the 50% drop in the stock now looks completely justified.
None of this is to say that you should sell companies like Salesforce -- or that they can't adapt to this new landscape and eventually thrive again.
Rather, it's to remind folks that some moats are great at protecting the business you already have, while doing absolutely nothing to attract further business.
When that's the case, it helps remind us that not all moats are created equal.
If you'd like to see four ways to determine if a SaaS company can survive and thrive in the Era of AI Agents, we think last week's webinar is a great place to start.
In the end, for all the fun we poke at Wall Street analysts, they're clearly trying to take the long view with these valuations. And that's something we can appreciate.
Wishing you investing luck in the months ahead,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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