Why the SaaS Sell-Off Is Creating Generational Buying Opportunities

The sell-off in software-as-a-service (SaaS) stocks could be creating a generational buying opportunity in the group. At least this is the view of Thoma Bravo, which is widely regarded as one of the top private equity investors in the SaaS space. It has taken many SaaS companies private over the years, and it currently owns about 80 software companies.

In a recent presentation, Thoma Bravo noted that SaaS stock fundamentals have moved in the opposite direction from their valuations. It noted that fundamentals are improving with about 20% annual SaaS growth expected over the next few years. Meanwhile, SaaS companies in the S&P 500 are growing their revenue at three times the rate of companies in other industries while having considerably higher gross margins.

That said, Thoma Bravo's presentation wasn't a blanket defense of the entire industry. It argued that not all software companies are alike and that some will eventually get disrupted by AI. However, the firm believes that SaaS companies with deep domain expertise will become winners in the agentic AI age.

While Thoma Bravo did not identify any of these potential winners, let's look at three that fit the bill.

ServiceNow

When it comes to deep domain expertise and a company that is tightly integrated with its customers' data and workflow, ServiceNow (NYSE: NOW) is a prime example. The company is deeply embedded within IT departments, where its solution helps manage networks and support tasks, while it has branched into other areas, such as human resources and customer service, with its workflow automation and digital processing tools.

The company has also embraced AI, both through its fast-growing generative AI suite of solutions, Now Assist, and the more recent introduction of its new AI agent orchestration platform, Control Tower. ServiceNow is still growing its revenue at a 20% clip, and the sell-off in the stock has brought down its valuation to an attractive forward price-to-sales (P/S) multiple of below 7 times and a forward P/E of 25 times.

Salesforce

Salesforce (NYSE: CRM) is another SaaS company that is a leader in its field with strong domain expertise in the customer relationship management realm. The company has also been deeply ingrained in its customers' data and has been a primary tool to help break departmental data silos to give customer service departments a unified view.

The company, however, has taken this to the next level through its introduction of Data 360, which can see and use data from third-party cloud providers and data warehouses without moving it. Meanwhile, its recent acquisition of master data management company Informatica lets it clean and standardize this "messy" outside data. This all helps set the company up to become a leader in agentic AI, as AI agents are only as good as the data they are fed.

Despite Salesforce being well positioned with Agentforce and the company projecting solid double-digit revenue growth over the next few years, the stock trades at a forward P/S ratio of just 3.7 times and a forward P/E of 14 times, making it a huge bargain.

Image source: Getty Images.

Workday

Workday (NASDAQ: WDAY) is a leading financial and human capital management platform with a treasure trove of human resource (HR) and finance data. However, it is those ties to HR that have made it one of the most punished stocks this year, with its shares down about 40% year to date, as of this writing. That has left it at the bargain basement valuation of a forward P/S multiple of just about 3 times and a forward P/E of 12 times.

However, Workday is still growing its revenue at a solid low-teens rate, and it is also leaning into AI and AI agents through several product offerings, including Recruiting Agent, Contract Intelligence Agent, and Talent Optimization. And while there is a risk of companies employing fewer workers, I do think that most SaaS companies will eventually transition to consumption or outcome-based pricing models. Workday remains a solid business, and the stock is just way, way too cheap at this point.

Geoffrey Seiler has positions in Salesforce and ServiceNow. The Motley Fool has positions in and recommends Salesforce, ServiceNow, and Workday. The Motley Fool has a disclosure policy.