Software as a Service, or SaaS, began in the late 1990s as the internet became more widely available. Instead of buying software and installing it on personal computers or company servers, businesses could access it online. A business built and hosted the software, and users simply logged in through the internet.
When cloud computing accelerated in the early 2010s, SaaS businesses grew alongside it. Companies no longer had to spend large amounts of money upfront on hardware and IT staff. They could subscribe to software, pay as they went, and scale easily as they grew.
For software companies, the benefits were even greater. Instead of relying on one time sales, they charged subscriptions. Revenue became recurring and more predictable. Gross margins, which simply measure how much money a company keeps after paying the costs to deliver its product, were often very high, typically north of 80%. And once the software was built, adding another customer cost very little. The powerful mix of growing recurring revenue and high margins is why investors love(d) SaaS businesses.
The recent correction in many SaaS companies is a clear reminder of how quickly market sentiment can shift. The iShares Expanded Tech Software Sector ETF (IGV), which is one of the better broad measures of the space, is down roughly 30% from the end of October 2025 while the S&P 500 is flat.
The main concern weighing on SaaS businesses today centers around new tools from leading artificial intelligence companies such as Anthropic and ChatGPT. These platforms are releasing applications that can replicate certain types of existing software. They are also giving users the ability to build customized tools internally, something now commonly referred to as “vibe coding,” where software can be created simply by describing what you want in plain language.
Investors worry that if companies can use AI to build their own internal tools, they may rely less on outside software providers. That could mean fewer seats sold and less recurring subscription revenue over time. Even if companies keep their existing vendors, SaaS providers could face pricing pressure when contracts come up for renewal. In simple terms, the concern is that growth slows and profit margins come under pressure at the same time.
Another reason the reaction has been so sharp is valuation. Many of these companies, for the reasons described above, traded at premium multiples. The iShares Expanded Tech Software Sector ETF (IGV) averaged roughly 36x earnings from 2020 through 2025. For reference, our Large Cap Growth benchmark at GHPIA is 27x. Today, IGV trades at 20x earnings.
Our view is that demand for software is not disappearing, and AI will ultimately create opportunity for many legacy SaaS companies. The real uncertainty lies in timing and in identifying which platforms can and will adapt.
Right now, the market appears to be treating the sector as guilty until proven innocent. Some companies will undoubtedly be impacted. Growth may slow. Pricing models may evolve. But many established platforms have the scale, proprietary data, customer relationships, and financial resources to integrate AI directly into their products, improving efficiency and expanding functionality. Others benefit from deep niche exposure, serving specific industries where expertise and embedded workflows make them harder to replace.
For that reason, we believe the recent selloff may be creating opportunities to buy attractive businesses at more reasonable valuations.
Top Row L to R: Brad Engle, Mike Sullivan, Sebrina Ivey, Christian Lewton, Jason Kitner
Bottom Row L to R: Carin Wagner, Angela Kennedy Lee, Jenny Merges, Brian Friedman, Deirdre Mcguire, Barbara Terrazas, Reed McCoy