Chart of the Week: Why ASX tech is poised for a comeback
The “SaaSpocalypse” never arrived. Now, software stocks are positioning for a long-awaited comeback.
Mentioned: WiseTech Global Ltd (WTC), SiteMinder Ltd (SDR), Technology One Ltd (TNE), FINEOS Corp Holdings PLC Chess Depository Interest (FCL)
This week’s insights come directly from our equity analyst Roy Van Keulen in the Australian Equity Market Outlook for Q3.
The ‘SaaSurrection’ is beginning
The technology sector has outperformed the broader Australian market in recent months, unwinding some of the massive prior underperformance. Fearful and pessimistic narratives about the “SaaSpocalypse” in the first quarter have yet to come to pass. We see some companies reporting a scaling back of their AI efforts.
Some of the benefits they see from AI are not sufficient to offset their costs. We also see more software companies in the US reporting a re-acceleration in revenue growth, including Atlassian, Salesforce, and ServiceNow, as IT budgets appear to be shifting back toward software. We think this “SaaSurrection” is underway, and the sector remains significantly undervalued. We look forward to the full-year results in August, as well as guidance and commentary for fiscal 2027 on customer demand for software.
Why tech moats matter
We view ‘thick’ software companies, those with feature-rich products customers rely on, as most protected from AI. After all, AI may lower the cost of software development, but if the cost of replicating a dominant software platform remains prohibitively high, that software is unlikely to be commoditised. WiseTech’s CargoWise is the prime example here. WiseTech has spent billions in R&D and acquisitions to build its existing software suite.
Even at half the software development costs today, any would-be competitor would still need to spend hundreds of millions of dollars and many years to replicate the software. Meanwhile, WiseTech (ASX.WTC) will use AI to develop new features that customers want, thus maintaining its lead. To a lesser extent, we also view SiteMinder (ASX.SDR), Technology One (ASX.TNE), and Fineos (ASX.FCL) as software companies that have developed thick software products with little competition.
The AI SaaSpocalypse narrative has not yet played out. Although some software companies have used AI narratives as a cover for previously planned layoffs, they are not laying off staff in response to AI supposedly boosting efficiency.
We are also not seeing a significant increase in hiring in software, which should happen at companies that still have many outstanding problems to solve for customers, given the cost to solve these problems has supposedly plummeted.
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