Silicon Valley big shots once boasted that software would eat the world. Now fear runs rampant that AI will cannibalize these former tech darlings. Yet Silver Lake's mooted interest in taking private the $47 billion HR services firm Workday (WDAY.O) may boost confidence. A buyout of one of the biggest names in enterprise applications would suggest the sector has durable cash flows and additional value to extract.
For much of this year, investors treated business software companies as if they faced an existential threat. Autonomous agents and the ease of “vibe coding” tools, the argument goes, would let customers rip out Salesforce (CRM.N), ServiceNow (NOW.N) or Workday and cheaply build their own replacements.
This idea overlooks some key customer incentives. Large companies need programs that scale, protect sensitive data, manage permissions and survive audits and changing regulations. Replacing them is a risky migration project. For instance, AI-generated code can produce security vulnerabilities, according to a report published by the UK National Cyber Security Centre.
The rising popularity of open-source language models, which require more effort for users to set up, also creates opportunities for middlemen. Project-management firm Atlassian noted customers of Claude Code and the like have been adding paid subscriptions, or “seats,” faster than those that do not. The Boston Consulting Group found in a survey that corporations rarely use their AI budgets to build tools entirely in-house: only 10% do so, while 78% pay for third-party companies to adopt AI.
Cash-rich incumbents can also shop around to shore up competitiveness. Salesforce has announced or completed roughly 17 acquisitions in the past 24 months, while Workday and ServiceNow have each made around half a dozen. Bundling new AI features into existing products may strengthen their pricing power.
Software-as-a-service stocks may have plenty of runway left. An iShares exchange-traded fund that tracks the industry is up 25% since February 27. Salesforce, Adobe (ADBE.O) and ServiceNow all trade below the roughly 17 times 2027 EBITDA multiple Workday reached after Reuters reported its potential deal. Smaller companies are flourishing, too. Constellation Software, valued at 11 times, is expected to throw off roughly $3 billion of free cash flow this year, and increase this 16% over the next three years, according to Visible Alpha. The overall mood is changing from sullen to cautiously upbeat.
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