AI is again fuelling talk that software-as-a-service (SaaS) companies will lose much of their footing, a so-called “SaaSpocalypse”. The debate appears to be intensifying after second-quarter earnings releases by major global SaaS companies.

As of Aug. 11, the industry says SaaS companies’ growth has not sharply slowed. But in valuation terms, many SaaS companies are facing difficulties.

The Wall Street Journal (WSJ) recently reported that shares of listed SaaS providers such as Salesforce, Workday and Adobe have fallen more than 30 percent from their highs over the past year.

IBM’s market value also shrank by $69 billion in a single day in July. A warning on its net profit outlook as customer spending shifted from software to AI hardware led to a sharp fall in the stock price.

HubSpot’s shares fell 19 percent two days after its earnings release, marking its worst drop in 10 years. Its cumulative decline over the past year topped 50 percent. Datadog also fell 19 percent on Aug. 7, its biggest drop since listing in 2019.

Falling valuations are also an issue for unlisted SaaS companies. Italian company Bending Spoons said it recently agreed to acquire spreadsheet-and-database startup Airtable for $1.28 billion in cash.

Airtable has raised more than $1.4 billion through multiple funding rounds. Its valuation topped $11 billion during the 2021 boom, but it fell sharply by the time of the sale. Sales enablement SaaS provider Outreach was once valued at $4.4 billion, but recently carried out restructuring that cut about 30 percent of its staff.

Bending Spoons to acquire Airtable for $1.28 billion

Even if AI does not eliminate SaaS, many expect a bleak future for SaaS companies that fail to respond properly to AI. Some point to the possibility that SaaS focused on specific tasks such as drafting legal documents, research and other repetitive work could lose prominence.

Manny Medina (매니 메디나), who served as Outreach CEO and recently founded startup Paid, told the WSJ that many software startups founded in the early 2010s have fallen into stagnation because they have not grown fast enough to attract meaningful interest from stock market investors. He said all the CEOs he meets are considering quitting and starting over.

SaaS startups are struggling as customer demand shifts from SaaS that helps people do work to AI agents that perform work in place of people, the WSJ reported. Executives at venture-backed SaaS startups are in a situation where they must lay off staff and overhaul their companies, it said.

Venture capital firms that invested in SaaS companies have also fallen into uncertainty as SaaS startups that seemed likely to go public on favourable terms are now in a situation where it is hard to be optimistic about the road ahead.

The WSJ reported that VCs are pouring billions of dollars into AI startups while fighting to protect the value of software companies they invested in before the AI boom. It said they are setting priorities among portfolio companies while preparing even to split and sell businesses or assets for some companies.

Interest is also growing in SaaS companies that are growing quickly in the AI era through change.

The WSJ said digital healthcare company Lantern, founded 15 years ago, used AI to overhaul insurance claims processing, creating conditions to complete a 16-step pricing process in about 1 minute that often took more than 2 weeks. The WSJ, citing CEO John Zutter, reported that this greatly improved Lantern’s profitability.

Sales software company Gong recently surpassed $500 million in annual recurring revenue (ARR). Gong’s ARR rose more than 55 percent from a year earlier.

Customer service software company Intercom developed an AI customer service agent, Fin, which achieved $400 million in ARR early this year. In June, Salesforce, the world’s largest cloud CRM company, announced it would acquire Fin for $3.6 billion.

Salesforce to acquire AI customer service startup Fin for $3.6 billion

Among listed SaaS companies, communications platform company Twilio and collaboration software provider Atlassian drew attention as their share prices rose on strong results. The two companies each rose more than 20 percent on Aug. 8 after their quarterly earnings releases. Atlassian posted its highest profitability since 2021, and its shares jumped 35 percent in a day, the biggest rise since its 2015 listing.

The Financial Times (FT) reported that Atlassian CEO Mike Cannon-Brookes directly pushed back against market expectations that AI would erode Atlassian’s business, saying customers are actively using AI but many are using it within Atlassian products. He also said companies often fail to clearly set investment goals and results even as they spend heavily on AI services, and stressed that improving the efficiency of AI investment is an important task.