I have been dismissing the narrative that "SaaS businesses are about to be disrupted by AI" up to now but I am starting to wonder if the market is picking up on something from the wisdom of the crowd.
We have already seen hyper-scalers increasing capital expenditure massively so far and justify it by 1) need to meet increased customer demand 2) need to future proof business from AI disruption (like Google needs to spend on AI to defend the search business )
Seeing Palo Alto Network's prints today (lowering EPS guidance), it kinda of hit me SaaS business may also need to increase spend (acquisitions, new product development to 'future proof their products from AI' )
I don't really believe SaaS business will go away or easily be replaced by some small shop developers who code a seemingly good product using AI over a weekend. It takes way more than a minimally viable toy product to convince enterprises to ditch trusted solutions and switch to a new , unproven product vibe coded by weekend hackers.
But - SaaS vendors may have to spend a lot of money to integrate AI, defend from competitors, pay for AI lab API costs, etc. The result could be lower free cash flow and downward pressure on EPS guidance across the sector - at least for the next few quarters.