A few things on SaaS Stocks before You Fall for the Value Traps

Off the back of watching Daniel Pronk’s in-depth video on the SaaS companies downturn in the stock market, I have some thoughts and insights that I don’t see discussed enough. - **Per-Seat Pricing is being replaced with Consumption Costs** - A lot of commentators are blaming AI software development like Claude Code for being the main reason software companies are being hit but this is a surface level interpretation of a wider trend. Dan's vid actually added colour to this “narrative”. Essentially the vast majority of SaaS enterprise companies operate on a per-seat pricing business model and the slowdown in the white collar job market means that there are less employees (seats) to charge for. So whatever growth projections a SaaS company has up to this point has been completely thrown out of wack. But some SaaS companies have already pivoted to charging consumption/ "per-prompt pricing" business model. This is bad for enterprise customers because now your costs volatile vs. periodic cost aka monthly subscription if their locked into an ecosystem (like Salesforce). Will enterprise eat up these new era pricing models or will that force them to build internally? - ** Enterprise can’t be squeezed anymore by legacy SaaS.** - Salesforce (CRM) is important but too expensive. I say this as an user throughout my career. I work in marketing and have used Salesforce products so I understand why enterprise customers depend on it (and hate it). I will give you my completely anecdotal opinion of why Salesforce is no longer a growth stock and why every investor commentator is wrong about it. Firstly, Salesforce isn’t just Salesforce. It is Tableau, Slack, Salesforce and all of the other Cloud spinoffs. And the user experience has deteriorated across it’s portfolio of apps. This has caused more recent competitors to keep chipping away at CRM’s portfolio of enterprise market share across their verticals. And I’ve seen it first hand. My previous company moved away from Marketing Cloud to a competitor. Now my current company is building an internal version of Salesforce right now and has migrated from Slack to Microsoft Teams because it’s free as part of the Microsoft Suite. And I just remembered we have both Google’s Looker and Tableau for analytics, just that nobody really uses Tableau. I can't prove it but I imagine this is happening across it’s verticals, where there's a slow decline with CRM becoming ever so more reliant on their high switching costs. To summarise, enterprise customers already deem CRM products as expensive i.e. they are waiting for the right opportunity to switch and AI fuelled competitors is that opportunity. - **AI makes Content Creation too easy to charge a premium for** - Adobe's stock is at one of its cheapest and for good reason imo. I agree with Dan on this - if content creation continues to become easier to do at a low cost, there’s literally no margin in Adobe’s business. It is very difficult to charge for a suite of features that can be accomplished with a simple prompt within a generic AI app (ChatGPT or Gemini). This dilemma is compounded by competition from Figma and Canva. At some point, Adobe will not be able to justify charging their clients more for features they can do cheaply elsewhere. It's a bit like how consultancy firms are getting battered because their service can be accomplished with a prompt. - **Consumer SaaS have different problems to Enterprise SaaS. ** It's more likely enterprise customers will replace you than consumers relying on vibe coded alternatives or building their own. Because apps are all about convenience and distribution which are both difficult to replicate. Let's take Duolingo for example. If someone wants to learn a language, they will not vibe code an app to do it. Nor will they ask ChatGPT to write them a curriculum and teach them for 10 minutes everyday. Refining that 10 minute learning sprint requires much more nuance than a customer has time for. Duolingo’s downfall isn’t going to be a vibe coded app, it’s going to be a cultural change where people stop wanting to learn languages (or chess, yes they doing chess in Duolingo). And if this doesn’t change then it’s Duolingo expertise for interactive courses vs vibe coders with no other good app ideas to steal. - ** Switching cost + Maintenance Cost vs. Cost to stay The main argument for buying Adobe's / CRM's dip boils down to its just too much effort and cost to create your own service. Which is a completely fair argument but few have tried to work out what's the threshold. Dan said something that caught my attention. Constellation Software only costs 1% of their clients business costs. When you put like that, it made me want to buy that company's dip. In summary, SaaS Enterprise deserve their valuations being corrected because they will need to justify their premium prices to customers with the tools to walk away. This is a value trap and you need think harder than looking at historical valuations and ratios and concluding it's a bargain.