The Market Reckoning for SaaS Multiples
The tape does not lie. Software is broken. Multiples are compressing faster than a hydraulic press. Goldman Sachs suggests this is noise. We suggest it is the signal. For three years, enterprise software companies lived on the fumes of cheap capital and the promise of infinite scaling. That era ended this week. The selloff in the software sector has accelerated, leaving investors to wonder if the bottom is a floor or a trapdoor.
Brook Dane of Goldman Sachs Asset Management recently argued that the current volatility creates opportunities. This is the standard institutional line. It assumes that the fundamentals of the software business model remain intact. They do not. The shift from seat-based pricing to consumption-based models has introduced a level of volatility that Wall Street is only beginning to price. When companies cut headcount, they cut software seats. When they cut seats, the recurring revenue disappears. It is a simple, brutal feedback loop.
The Death of the Rule of 40
Growth is no longer enough. For years, the Rule of 40 (the sum of a company’s growth rate and profit margin) was the holy grail of SaaS investing. If you hit 40, you were a darling. If you hit 50, you were a god. Today, the market has rewritten the rules. Investors are demanding immediate cash flow. They are tired of adjusted EBITDA that excludes the massive stock-based compensation (SBC) packages that dilute shareholders into oblivion.
Per recent data from Bloomberg’s analysis of the IGV ETF, the software sector has seen a 12 percent drawdown in the last 48 hours alone. This isn’t just a dip. It is a fundamental repricing of risk. The cost of capital is staying higher for longer. This reality is finally sinking in. Software companies that rely on external financing to bridge the gap to profitability are being left for dead.
Visualizing the Software Sector Decay
IGV Software Index Performance (February 23-27)
The AI Displacement Risk
Artificial Intelligence is the double-edged sword. Every software CEO is pitching an AI story. Most of them are lying. The reality is that generative AI poses an existential threat to traditional SaaS. If a developer can use an LLM to build a bespoke internal tool in a weekend, why pay a million dollars a year for a legacy platform? This is the “displacement risk” that the market is starting to sniff out. It is not just about who wins the AI race. It is about who loses the utility race.
According to Reuters reporting on enterprise spending, IT budgets are being redirected from general software to specialized AI infrastructure. This is a zero-sum game. Every dollar spent on H100 clusters is a dollar not spent on CRM seats or HR management tools. The signal that Brook Dane mentions is actually a warning flare. The noise is the marketing fluff coming from Silicon Valley earnings calls.
48-Hour Performance of Major SaaS Constituents
| Ticker | Company | 48-Hour Change | Forward P/E |
|---|---|---|---|
| CRM | Salesforce Inc. | -4.2% | 24.5 |
| ADBE | Adobe Inc. | -3.8% | 21.2 |
| NOW | ServiceNow Inc. | -5.1% | 38.9 |
| WDAY | Workday Inc. | -2.9% | 29.4 |
| SNOW | Snowflake Inc. | -7.4% | N/A |
Look at Snowflake. A 7.4 percent drop in two days. This is a company that was once the poster child for the cloud revolution. Now, it is a victim of its own valuation. When growth slows from 50 percent to 20 percent, a 50x revenue multiple becomes impossible to defend. The market is now looking at SEC filings with a magnifying glass. They are hunting for hidden SBC and slowing NRR (Net Revenue Retention). If a company cannot keep its existing customers spending more, it has no future in this environment.
The Technical Breakdown
Technically, the IGV has breached its 200-day moving average. This is a bearish signal that often precedes a deeper capitulation. We are seeing a rotation out of growth and into value. But where is the value in software? Most of these companies still trade at premiums to the broader market. A P/E of 25 for a company growing at 10 percent is not a bargain. It is a relic of the zero-interest-rate policy (ZIRP) era.
The institutional narrative will continue to call for a bottom. They need the liquidity to exit their positions. Retail investors should be wary of the “signal” being broadcast from the big banks. The fundamental shift in how software is built, sold, and consumed is not a temporary blip. It is a structural transformation. The winners will be few. The losers will be many. Watch the March 12th cloud consumption report. If Microsoft and Amazon show a deceleration in Azure and AWS growth, the software floor will fall through entirely.
