SaaS: We are nearing the bottom

Pant Wetting, Panic Selling, It's all over

TLDR: a lot of pant-wetting and panic selling.

I want be super clear. I never try to time the market. From time to time, though, I can tell when we’re near a bottom or a top, it’s usually the combination of two key factors: Excessive emotions and a significant disconnect from material financial results. At a peak, it’s typically exuberance and degenerate multiples. At a trough, it’s panic selling, especially at multiples that don’t reflect the underlying fundamentals of the business today. Let’s examine the indiscriminate selling first, as I believe it highlights the current market sentiment.

The Panic Selling has become indiscriminate

In the middle of last year, we began to see the start of the software as a service sell off. It made sense to me at the time, as many of these businesses were trading at multiples that did not reflect their fundamentals. 40x earnings for 10% growth? Gross. If a business is priced to perfection, there is no room for flaws in the thesis. The original sell-off was a reasonable and fair re-rating in my opinion.

What’s been surprising to me, though, is that in the last couple of months, we started to see truly indiscriminate selling of businesses that are under zero threat from AI. Take Fair Isaac Corp. (FICO), for example. For those not aware, FICO offers credit scores for anyone trying to take on debt, and they are the industry standard. FICO has been issuing credit scores for decades; as a result, their scores are battle-tested through recessions, pandemics, and wars, etc.

If you issue debt on a FICO score, you have a pretty good idea of how that consumer will fare through any scenario, because FICO scores have a long history of real results. AI can’t replicate that track record; no simulation can substitute for decades of real performance. Additionally, these scores represent a marginal cost relative to the overall underwriting expense when writing the debt. For a mortgage, for instance, it’s less than 0.2% of the total closing cost. Virtually nothing, so there is little incentive to change.

Typically, these loans are collateralized, and if you collateralize a loan in the absence of a FICO score, you lose money immediately. Investors are not paying market rates for debt that hasn’t been rated by the industry standard simply because the underwriting company wants to save $20.

FICO’s moat is not that other companies cannot reproduce their score. Its moat is being embedded as an industry standard, supported by decades of data.

AI has zero effect on this. Zip. Nada. There is no plausible scenario where the entire finance industry abandons an established standard in favor of scores that haven’t even been tested through a recession. Here’s where things get particularly brain-dead, though.

Some of the earliest AI use cases were in credit scoring. In the past, AI was referred to as machine learning. FICO has been using ML to develop its scores for nearly a decade¹. A company that has built its credit score using AI for over a decade now is going to be disrupted by….. AI?? This is what panic selling looks like. There is no thought process. People are just exiting the trade entirely. I understand the Adobe sell-off; image generation is powerful and a clear threat. But FICO? makes no sense. Which brings me to my next point, this sell-off is front-running any material change in financial results. You would think these companies are about to implode. Let’s examine these at greater depth.

The Financials

Not a single company listed below has seen any material weakness in their results from AI. Yet all of them are selling off as they’re seeing a deterioration in their business. We haven’t even had a chance to report Q4 yet, and the market continues to sell off aggressively on narrative alone. I believe this is likely the bottom, and we’ll see a reversal soon, given the incredibly strong results from these companies in recent quarters. Until I see a material change in fundamentals, I will stick to my core belief that SaaS is significantly oversold here.

Company: Adobe
Ticker: ADBE
Price: $272.64
Market Cap: $120.43B
P/E (TTM): 15.6
Price / Free Cash Flow: 12x
Revenue Growth (Last Quarter): 10%
Earnings Growth (Last Quarter): 14%

Commentary

As powerful as image generation is, it’s not yet enough to take what’s in your mind’s eye and bring it to fruition. You’ll still need Adobe’s tools to properly express exactly what you want. I’d also remind people that this company is hugely free cashflow positive and deeply embedded in the creative industry. They can also acquire and merge with any type of competitor if needed. I’ve already been writing about Adobe for a long time at this point. I don’t have much left to say. Q1 will be another record print for Adobe

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Company: Salesforce Inc.
Ticker: CRM
Price: $195.92
Market Cap: $198.92B
P/E (TTM): 27x
Price / Free Cash Flow: 15.4x
Revenue Growth (Last Quarter): 9%
Earnings Growth (Last Quarter): 35%

Commentary

Salesforce is already deeply embedded in most Fortune 500 companies. All they have to do is compete with any new options that come out, and people will simply stick with Salesforce out of convenience. Do not underestimate switching costs. Fortune 500 companies have zero interest in recreating their CRM products and are focused on their core line of business. I personally would not be a buyer of CRM here given their growth rate, and I’d like to see the multiples come down more. Outside of that, I believe this company will be fine in the long term.

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Company: ServiceNow
Ticker: NOW
Price: $108.93
Market Cap: $123B
P/E (TTM): 70x
Price / Free Cash Flow: 27x
Revenue Growth (Q4): 20.5% YoY
Earnings Growth (Q4): 26%

Commentary

I personally think ServiceNow is still really expensive. If you take out stock-based compensation, for instance, their free price-to-free cash flow multiple is closer to 50. I’m not super familiar with the business, to be frank, so it’s possible somebody has a better understanding of how their accounting works and they’re cheaper than they appear. I think ServiceNow is worth watching, and I’d be interested in entering the business to sell off another 30-40%.

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Company: Intuit
Ticker: INTU
Price: $434.8
Market Cap: $135.55B
P/E (TTM): 28.4
Price / Free Cash Flow: 27.7
Revenue Growth (Last Quarter): 17% YoY
Earnings Growth (Last Quarter): 26% YoY

Commentary

Intuit has already positioned itself as the industry standard for tax and accounting. All Intuit has to do is be competitive with any new products that come out. Most accounting firms have decades of customer data with Intuit. They’re not going to be willing to switch easily.

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Company: Fair Isaac Corporation
Ticker: FICO
Price: $1,360
Market Cap: $34B
P/E (TTM): 50x
Price / Free Cash Flow: 46x
Revenue Growth (Q4): 16%
Earnings Growth (Q4): 22%

Commentary

I know that, at first glance, FICO might look expensive, but they have significant pricing power, and mortgage refinancings have been at historical lows. This is a company that could plausibly double its earnings within a year or two. It has an incredible moat. FICO has been the industry standard for credit scoring for decades. It’s unlikely for that to change soon. The business is definitely cheap here.

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Company: Duolingo
Ticker: DUOL
Price: $124
Market Cap: $6.5B
P/E (TTM): 30x
Price / Free Cash Flow: 17.5x
Revenue Growth (Last Quarter): 36%
Earnings Growth (Last Quarter): Not a meaningful metric

Commentary

The Duolingo team is honestly exceptional. With Ivy League graduates, 4.0s, etc., you get the point. They have no competition because they beat their competitors 10 years ago. The narrative is that it’s some sort of upstart quirky app, but in reality, they’ve way overdelivered relative to the product and segment they’re in. I personally think Duolingo ends up being cheap here, and I also believe AI will be a significant tailwind to their business. It’ll be interesting to see how they do in 2026.

Serial Acquirers

One thing that’s occurred to me about serial acquirers is that they’ll likely remain attractive even if there is a decline in software-as-a-service. The chances of the SaaS industry being eliminated entirely are zero. If Software as a Service weakens, there would be significant compression in multiples in the private market. While serial acquirers do raise money at times, they’re also hugely free cash flow positive. I personally believe it’s more likely their businesses will accelerate, as they’ll be able to acquire more and should be able to offset any potential decline comfortably.

Company: Constellation Software
Ticker: CSU.TO
Price: CA$3,300
Market Cap: CA$52B
P/E (TTM): 30x
Price / Free Cash Flow: 15
Revenue Growth (Last Quarter): 15% YoY
Earnings Growth (Last Quarter): 20%+ YoY

Commentary

see above

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Company: Topicus
Ticker: TOI.V
Price: CA$130
Market Cap: CA$8.7B
P/E (TTM): 200x
Price / Free Cash Flow: 17
Revenue Growth (Last Quarter): 24%
Earnings Growth (Last Quarter): Not a meaningful metric

Commentary

I would personally prefer Topicus over Constellation just because I believe they are cheaper relative to their growth and have a longer runway given their smaller size

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Company: VitalHub
Ticker: VHI.TO
Price: CA$8.22
Market Cap: CA$560m
P/E (TTM): Not useful
Price / Free Cash Flow: 17
Revenue Growth (Last Quarter): 94% YoY
Earnings Growth (Last Quarter): 28%

Commentary

I think VitalHub goes under the radar a bit because there’s Hero Acquire in the healthcare space for Canada and the UK. These are socialized programs, but healthcare SaaS remains highly profitable in these markets. They sold off after a $100M equity raise and have continued to sell off with the broader SaaS market. In healthcare, most providers are extremely reluctant to change software. It’s very difficult to migrate customers’ data safely and quickly. There’s also significant friction when it comes to training staff on new software. This isn’t even about technology; it’s just bureaucracy. Companies like VitalHub will do even better in these scenarios because they’re an exceptional team and have no problem adopting AI to their products, in my opinion.

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Company: CareCloud
Ticker: CCLD
Price: $2.52
Market Cap: $122.95
P/E (TTM): 38.1
Price / Free Cash Flow: 5.7
Revenue Growth (Last Quarter): 9% YoY
Earnings Growth (Last Quarter): $-0.04 → $0.04

Commentary

I don’t think many people are familiar with CareCloud, but they are a serial acquirer in the revenue cycle management space for healthcare. The current CEO has done a solid job of turning the business around, and EPS growth is accelerating rapidly. I’m not entirely sure what EPS they’ll have next year, but I think it’ll be at least 50% higher than 2025. They’ve been getting dragged down slowly but surely with the rest of this SaaS sell-off.

I think all these serial acquirers listed here are exceptionally cheap and are the cheapest among all of the SaaS sell-offs. After that, I like Adobe, Inuit and Fico in the traditional SaaS space. I find CRM and NOW to be expensive still. Finally, Duolingo, I'm not really sure how to value them, to be honest. If we go off the growth relative to financials, though, they are cheap here.

Conclusion

1. All these companies have posted extremely strong financial results in their most recent quarters

2. The sell-off has been driven largely by the narrative

3. We have yet to fully report Q4 earnings, the market has decided to wet its pants, and panic sell without seeing any material changes in their fundamentals

4. I’m backing up and loading up
   

1. https://www.fico.com/blogs/can-machine-learning-build-better-fico-score