r/valueinvesting
Hot take on SaaS apocalypse
Author warns MSFT and SaaS stocks face further multiple compression, as markets ignore fundamentals longer than investors remain solvent.
- Market can further compress multiples, with MSFT forward P/E potentially dropping from 20 to 15.
- Historical examples like PayPal show low valuations can get even lower and stay depressed.
- Doubts about whether massive tech and consulting companies can sustain double-digit growth over the next decade.
Ironically making a post about SaaS stocks... because I'm sick of seeing the exact same posts daily.
Honestly, I see all these discussions about Microsoft, Accenture, Adobe, and ServiceNow right now. And as much as I agree that the recent selloff might be overdone, things can still get a whole lot worse before they get better, and I don’t think everything is as undervalued as people make it out to be.
I’m saying this as someone who actually has skin in the game - I've got 7% of my portfolio between Microsoft (5%) and SAP(2%) - flat on MSFT and down 13% on SAP. I WANT these stocks to do well. But the fact of the matter is: the market doesn’t care about my or your feelings.
The market doesn't care if you think a single digit P/E is unjustified for Accenture, or that Adobe is buying back a massive 1/4 of the company through buybacks. People see MSFT at a forward P/E of 20 and think it's a steal. So what? It can go to 18 or even 15. Or 20 can be the new norm? These might be solid companies, but just look at something like Charter and Comcast. People thought a forward P/E of 6 and 8 was insanely cheap, and now we’re sitting at a 3 and 5 with "only" a slow, single-digit decline.
Now, you can argue that the quality of Charter's business is different, but what about PayPal? It is literally still growing, and look at it. Same exact thing - the market doesn’t care and it hasn’t for the last 2 years. And the market can continue to not care for a very long time, neglecting a company way longer than you can stay solvent.
For the people arguing that companies like Accenture are fine because they are still growing - possibly, but the risk is still here. Honestly, do you really think these massive companies can grow double digits into the next decade? I’m not talking 2, 3, or 4 years from now. What about 10 years out? And do you really think consulting clients are just going to pay the same premiums knowing full well Accenture will use AI tools reduce workloads and drive down costs? Or perhaps even opt to in house more services, even if it’s just a tiny fraction. Many see AI as a pure tailwind, and I believe customers might start expecting way more for their money too soon. Even a slight reduction in margin means those forward P/Es under 10 can get less attractive very quickly…
MSFT is also not the bargain deal of the century. They are a solid company with great fundamentals, but there is genuine uncertainty for the long-term outlook. There is massive execution risk here. AI is a double-edged sword. Time will tell if they can properly charge per seat for Office + token-based usage, and with exploding AI infrastructure costs, will their margins really stay the same? I believe they’ll navigate this uncertainty well, but I’m also not increasing my position until I see more clarity or a far worse selloff. Fact of the matter is, a PE of 20 really isn’t as cheap as people make it out to be. It’s fair value in my eyes.
Same thing with Adobe. There is huge execution risk in changing their pricing model, they face more competitors than ever, and even though I’m sure they’ll remain the standard for editing, they have to invest into AI tools just to stay competitive. There is real uncertainty about how that affects margins long-term, despite what bulls believe. I have this company on my radar, but there needs to be a bit more clarity for me. Also management throwing money out the door with 25B in buybacks instead of improving the product doesn’t give me vote of confidence.
Stop looking at trailing metrics and assuming a "cheap" P/E means a bottom. The macro environment has changed, and a company being great doesn't mean its stock price can't drop another 20%. Add SBC and numbers also look a whole lot different. Consider that margins have a huge impact on that PE, a couple hundred basis points can make a huge difference for these SaaS and consulting companies, question is which ones really have pricing power and tailwinds, which of these do you believe can actually keep their pricing power and try to look further ahead than next years guidance to decide if that pricing power / growth is actually sustainable, and if you believe it’ll slow down, will it really only slow down? Or is it possible to start seeing churn.
Overall I get that people are bargain hunting, but it’s really not as black and white as some make it out to be and there are real risks and reasons these companies are dropping and dropped. Now the real question is finding those companies which have the pricing power and bring enough value in the long run.
Just focus on the cash the business actually will produce for you, not on the hope that the next guy will pay a higher multiple for it
But that’s value investing
Did you completely miss the point? It's not possible to focus on the cash the business generates because there is no certainty of cash generation in the future. The past literally does not matter. In fact the most likely thing to happen is cash generation goes down as AI capex spend goes up, marketing spend to thwart competitors forever will go up, and trying to convince customers NOT to switch out will cost margins.
There is a point where you have to look at PE ratios because they’re so compressed it literally can’t go any lower. For Adobe specifically If a broader market correction hits or if pre-earnings panic completely unhinges the stock, $150 represents the "hard mathematical ceiling" of how low the bears can push it.
The Valuation at $150: This puts the stock at a 6.1x forward P/E and a 17.4% Free Cash Flow yield.
At $150, the company becomes an aggressive arbitrage target. Adobe's active $25 billion stock buyback program would allow management to physically buy back and retire nearly 33% of the entire company's outstanding shares at these prices. Institutional value investors and private equity desks would step in to aggressively defend this line because the cash-flow generation alone would pay off the investment in under 6 years.
The market had priced in a -4% revenue growth on Adobe at current price. It’s has 10-12% revenue growth for the last 10 years, including more recent earnings.
Some of these stocks are so oversold that they are in the range to be acquired while generating billions in free cash flow, eventually the fundamentals meet the shorts and there’s no more room to go down.
Not hating on OP, but the narrative that legacy SaaS companies aren't adapting to AI is blinding the market to one of the highest value plays right now. If you look closely at Adobe, they haven't just "adapted" they’ve completely pivoted their products to build an ecosystem for marketing and enterprise.
They used to just be a tool for creating content. Now, if you watch the latest Adobe Summit, you realize their moat isn't just the software anymore. It's the historical campaign data, the brand design assets, and Firefly AI (which is trained on legally safe data, with Adobe guaranteeing they'll cover any copyright lawsuits for enterprise clients).
Currently, AI tokens are subsidized, making standalone AI tools seem cheap and replaceable. But image generation is inherently expensive and will stay that way. While other SaaS companies are going to see their margins crushed by the "Nvidia cloud tax" when billing becomes usage-based, Adobe played this perfectly. Instead of burning capital to build a massive frontier model for everything, they built small expert models that don't require heavy cloud hardware. A lot of their features run on Edge AI (using the local user's hardware). This minimizes inference costs and protects Adobe's ridiculous \~88% Gross Margins.
AI makes creating an image practically free, which means the internet is about to be flooded with infinite content. When content is infinite, the value shifts from creation to attribution. Adobe's true moat is their "Content Supply Chain." They don't just help a company generate an image; their Experience Cloud ecosystem tracks that asset, distributes it, and tells the CMO exactly which of the 10,000 AI-generated images actually drove a sale. You can't get that from a standalone AI prompt box.
For users who do want frontier LLMs (like OpenAI's Sora or Runway), Adobe is acting as a complementary workflow to optimize and improve the output. But strategically, this is a brilliant trap. By opening up Premiere Pro and Photoshop to third-party models, Adobe is commoditizing the frontier LLMs into easily swappable, invisible backend APIs. They keep the user locked in their ecosystem and own the final workflow, letting the AI startups burn cash on the heavy compute.
Because Adobe relies on optimized local models, they have massive operating leverage. If we assume a conservative 10% top-line growth driven by this enterprise AI adoption, their SBC-adjusted free cash flow will grow from $8.3B today to over $12B by 2030. But this is just imo for Adobe and Accenture for example, I think it's an entirely different case. There will be SaaS companies being destroyed, especially the ones that don't identify their real moat and pivot to protect it... (even Dario Amodei said this in other wording)
Well, PYPL (which I just bought) will retire all their shares in 6 years at current levels. People just dont care about this.
The main and only reason SaaSpocalype is continuing is because...
People are putting money here:
MU SNDK AMD INTC PLTR LRCX AMAT KLAC APH GLW CAT VRT CEG VST NRG FIX GEV PWR EME ETN ANET WDC DELL STX ASML NBIS IREN IESC STRL AGX
People are taking money out of:
Everything else.
Until this bifurcated market ends and the music stops, SaaSpocalypse will continue. Which frankly, I don't mind, I'm loving that everything else is cheap.
Microsoft is the bargain of the century. I will die poor on this hill
Why? Because it's historically cheap vs its own multiples? That's true.
But on a pure dcf basis, at best, it justifies it's current price and that's debatable given it's drunken sailor capex.
There are so many better deals, even crm or servicenow, much less Adobe or PayPal.
I disagree. Hyperscalers are massively undervalued. The largest ai buildout is underway. Every company existing are pivoting toward AI use to be more efficient. IMO analysts massively underappreciate the data center revenues in the upcoming years. Revenue growth will accelerate more than anticipated.
This is just silly. First, a DCF model is a choose your own adventure story depending on the assumptions you use. It is easy to make a DCF model say Microsoft is a 5T company and it is easy to make it say it is a 1T company. A DCF is as good as its assumptions which you conveniently failed to provide.
Microsoft is a bargain because it is the best SaaS company to ever exist. It is leveraging its SaaS advantages into AI. As of today, it is the second biggest company (not far from first) in the super lucrative cloud space and it is easily the best at commercializing AI with its SaaS advantage.
The capex isn’t as big of a deal to me as it is to others because it is going to cloud computing which is high margin business segment that js satisfying the world’s biggest backlog compute backlog. On top of that, Microsoft has a world class op profit to fund it and is one like 3 companies with a triple A credit rating. It has deep access to the capital markets.
Microsoft & Google are a different class when it comes to AI capex.
Microsoft (2.7T) 148 op profit (TTM) is second only to Nvidia (5T) ahead of Google and Apple (4.3T). If it values its ownership in OpenAi like Google does SpaceX and Anthropic, it will instantly have the greatest earnings of any company in human history and it wouldn’t be close.
I mean it’s alrighttttttttt, bargain of the century would be like 10 pe
Yep buy backs at these prices is a no brainer.
It has over 400 million active acc. This alone is worth more than current valuation.
thats what makes the least sense to me. I'd get the fears if the revenue was declining or even stagnant. But ironically its growing when the ai hype is the biggest its ever been.