Is 'SaaS Is Dead' Premature? Salesforce Leads Software Stock Rally, Potential Gains Through October

Over the past year, U.S. software stocks have been mired in concerns that AI will boost employee productivity, leading companies to reduce headcount and software subscription seats. Additionally, 'vibe coding' has lowered the barrier to custom software development, fueling loud claims that 'SaaS is dead.' However, with strong earnings reports from Salesforce (CRM-US) and Workday (WDAY-US), this pessimistic narrative is beginning to unravel.

Salesforce, a bellwether for the software industry, released robust quarterly results last week, pushing the iShares U.S. Expanded Tech-Software ETF (IGV-US) back into positive year-to-date returns. Investors are now questioning whether the worst phase of software stock sell-offs has ended.

Salesforce's second-quarter revenue and profits both exceeded Wall Street expectations, and the company raised its full-year guidance. Notably, current remaining performance obligation (cRPO) grew 14% year-over-year, while net new annual contract value hit a four-year high. As a result, the stock surged 22.6% on Thursday.

During the earnings call, Salesforce CEO Marc Benioff stated that while the market expected subscription demand to decline, the opposite occurred. Sales for Agentforce, service, and Slack all grew year-over-year.

Michael Monaghan, Partner and Portfolio Manager at Founder ETFs, noted that this earnings report directly answers the 'life-or-death' question facing Salesforce. Rather than losing customers, clients are upgrading to higher-priced plans to adopt the latest technologies.

Monaghan maintained confidence that software companies would see a strong AI-driven recovery in the coming months, even during the sector's sharp March sell-off. Salesforce's latest results may be the first strong validation of this trend, demonstrating that the idea of 'vibe coding' alone eliminating packaged software is unfounded.

This rebound isn't limited to Salesforce. Workday's stock jumped 5.8% on Friday after its latest subscription revenue beat market expectations. Management revealed that annual recurring revenue (ARR) from its autonomous AI products has reached nearly $600 million, up from $500 million last quarter.

CrowdStrike (CRWD-US) and ServiceNow (NOW-US) also posted notable gains over the past week. Rising AI-driven cybersecurity threats have boosted demand for CrowdStrike's Falcon platform, leading to the company's best-ever quarterly performance. ServiceNow, similar to Salesforce, is increasingly becoming the authoritative data repository for enterprise clients—data that cannot be easily replicated by AI.

Nicholas Frasse, Product Manager for thematic ETFs at VanEck, acknowledged that some software firms may be replaced by cutting-edge AI labs, but cautioned against generalizing across all SaaS companies. Established players like Salesforce possess unique proprietary data, enabling them not only to maintain competitiveness in the AI era but also to become its biggest beneficiaries.

Frasse believes investors are now filtering out market noise and making more precise selections based on individual business models, moving away from indiscriminate buying or selling of the entire software sector.

However, there is still debate over whether this rally can last. Some argue that the recent sharp rebound in software stocks is merely a result of capital rotating out of heavily sold-off chip stocks. Others believe the rally has stronger underlying momentum.

Jordan Klein, Tactical Strategy Analyst at Mizuho, noted the key uncertainty is how long the inflow of capital into software stocks will last before institutional positioning adjustments are complete or buying momentum fades. Klein believes this rally is primarily driven by institutional rebalancing rather than a fundamental shift in business performance.

Previously, many hedge funds and growth funds held software stocks at levels far below their market weight, partly due to AI-related fears and a shift toward semiconductors and AI hardware. But precisely because of this underweight positioning, Klein expects the rebound could extend into September or even October. He is optimistic about Salesforce's stock rising ahead of its upcoming Dreamforce event next month but advises against chasing the current price, instead favoring other high-quality software stocks like ServiceNow and Microsoft.