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There is obviously a ton of talk right now about the danger Claude and other AI services pose to the SAAS sector. Like always the market is punishing the whole sector, when a more nuanced approach is appropriate.
I am reminded of the transition of retail to internet. Many retails stocks were extremely out of favor (in many cases justifiably so) as Amazon started rapidly expand. While it was clear where the trend was going, many of the old retailers that embraced the transition, and had business models that were less “internet-able” have had spectacular performance. Some examples include Walmart, Costco, At Home before they were taken private, and Autozone. Lowe’s and Home Depot have also held up ok as businesses. While there are some (JC Pennys, Sears) that were absolutely crushed.
I expect a similar pattern to playout with SAAS companies.
Some companies sectors were very easy for the internet to displace, the obvious example being books where selection is important (often you are looking for a specifics book, a physical store could never match Amazons selection), and often you are not in a huge rush to get a book. Compare that to grocery stores which have many perishable goods, and hardware stores and auto parts stores where often you need something right away and there are many cheap specialized parts which are not that profitable to deliver online.
There are similar aspects of SAAS businesses that make some more protected than others. There are far more than I can list but two immediately come to mind:
Proprietary data: AI is going to absolutely bury companies that scraped public data and consolidated it, but if a company has significant proprietary data, AI is not going to be able to reproduce that.
Regulatory: SAAS companies in sectors with extremely tight and complex regulatory environments are going to be much tougher to displace. It will make the software more complicated to build, but in many cases you might need regulatory approval for software, which will take time regardless of how easy it is to build. Also it maybe be extremely costly if AI built software misses some specific regulation through error or hallucination, which if that leads to massive fines that could reduce the cost advantage of building software with AI.
It’s important to remember some of the incumbents will be winners in this transition, just like some tradition retailers have been winners. For the incumbents that do win the lowered cost of creating upgrades and new features that AI provides can be a significant tailwind. Just like some retailers succeeded in adding internet sales to complement and expand their existing businesses, and leveraged their existing advantages to become internet sales winners, I expect some software companies to utilize their current advantages to become AI leaders.
Specific example: two companies I really like are VEEV and GWRE, they operate in very specialized and highly regulated industries, have absurd switching costs (it takes companies 2-3 years to switch to guidewire and can costs 10s of millions). These companies have deep institutional knowledge that should help them be winners, and have some specific features it will be tough. VEEV for example benefits from the regulatory requirement for an unbroken chain of every piece of Data in a trail, and GWRE is embedded in the transaction processes of claims processing.
As compared to a company like Salesforce (not that I think Salesforce can’t be a winner, it can and its scale provides a huge advantage but I view it as more at risk) their product is more general purpose. That gives them a bigger TAM, but the less specialized format is easier to displace. My company uses Salesforce, it would definitely be annoying to switch to another CRM, but it would not be legally dangerous like switching from VEEV or GWRE, and it wouldn’t take 2-3 years or costs 10s of millions. Just an example of how I am thinking this through.
Curious to hear others thoughts on which companies competitive advantages are still durable, no AI did not write this.
TLDR: the SAAS apocalypse is a real concern, but some companies are for more durable than others.