AI Disrupts SaaS? Citigroup: The Software Industry Will Enter a “Winner-Takes-All” Era of Major Divergence

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Artificial intelligence is launching a disruptive impact on the software industry, and the traditional SaaS (Software as a Service) business model is facing a severe test.

According to Wind Chaser Trading Desk, Citi analysts Tyler Radke and Fatima Boolani stated in a report released on September 2 that AI will not simply end the "Software as a Service" (SaaS) model, but will instead usher in a new era of "winner takes all" polarization, where the market will be clearly divided between a few high-growth winners and the majority of stagnating laggards.

Citi believes that although the market is generally concerned about the disruptive impact of AI, leading to pressure on software stocks, this sell-off may be "generally overdone." However, risks do exist, especially for application software companies that rely on seat-based pricing models.

AI will become a watershed, creating a huge valuation gap between different software companies. Data shows that since 2022, software companies with a growth rate above 20% have seen their median enterprise value/revenue (EV/Revenue) valuations nearly double to 11.7x; while those with growth rates below 10% have valuations stagnant at about 4.9x, close to the low point during the 2016 'SaaS-acre' (SaaS Massacre).

Citi also provided an 'All-Weather AI Portfolio', including Microsoft, MongoDB, Snowflake, and others.

Three Possible Impacts of AI: From Disruption to Empowerment

Citi’s report constructed three scenarios to model the potential impact of AI on existing software vendors. These three paths outline a wide spectrum from the worst disruption to the best empowerment.

Bear Case: In this scenario, the development of AI and LLM (Large Language Models) will make creating customized applications exceptionally easy, directly impacting and even replacing existing software vendors. At the same time, AI will accelerate the decline in the number of knowledge workers, dealing a heavy blow to the seat-based SaaS model. Under such circumstances, application software companies such as ADBE, CRM, NICE, as well as back-office software companies like ASAN, WDAY, will face the greatest risks. Meanwhile, "hyperscalers" and data infrastructure companies providing database and computing services (such as MSFT, MDB, SNOW, ORCL) will be the main beneficiaries.Base Case: This is viewed by Citi as the most likely scenario. Existing giants with innovation capabilities will successfully develop and commercialize AI products, with new revenue enough to offset the pressure on the seat-based model, thus maintaining overall revenue growth. This is neutral to slightly positive for most SaaS models, while hyperscalers and data infrastructure providers remain winners.Bull Case: In this most ideal scenario, existing software giants will lead AI innovation, driving a new product cycle and accelerating revenue growth once again. Even if “seats” come under pressure, they will successfully shift to results- or usage-based pricing models. This would be highly favorable for many existing software companies (such as MSFT, CRM, NOW) and may also spur further M&A activity targeting successful AI startups.

“Winner Takes All”: Valuation Divergence Is Already a Reality

The market has already sensed the winds of change and is pricing future winners and losers with real money. Data shows that software company valuations have diverged sharply.

According to Factset, as of August 26, 2025, software companies with growth rates above 20% now have a median expected EV/Revenue (NTM) of 11.7x, nearly double the low point in 2022. In contrast, companies with growth rates below 10% have median valuations of just 3.5x, almost the same as the low points in the 2016 “SaaS-acre” (SaaS Massacre) period.

Free cash flow (FCF) valuations also show the same polarization: high-growth companies have a median expected EV/FCF of as high as 56.2x, while low-growth companies are only at 16.0x. This clearly shows that capital is concentrating in a handful of high-growth companies deemed able to ride the AI wave, while others face valuation pressure.

The report compares current sentiment to 2016’s “SaaS-acre,” when slowing growth and business model concerns led to valuation collapses. Citi points out that while overall valuations have not yet hit the absolute lows of 2016, the pressure is concentrated among low-growth groups, whereas high-quality, high-growth companies have maintained or even expanded their valuation premiums.

Spotting "All-Weather" Winners: Citi’s AI Investment Strategy

Faced with a complex outlook, Citi has proposed a twelve-company ‘All-Weather AI basket’ to spotlight those companies with strong competitiveness in any scenario.

Application and Data Software: Microsoft is viewed as a core winner, with deployments across AI infrastructure (Azure), AI applications (Copilot), and AI search. MongoDB (MDB) and Snowflake (SNOW), as leading data management platforms, are set to benefit from AI-driven data volume and product cycles. AI infrastructure provider CRWV is also favored due to its business model being decoupled from upper-layer applications.Infrastructure and Cybersecurity: Datadog and Dynatrace, with their mature usage-based models, can effectively avoid the risk from seat-based charging. CrowdStrike, Palo Alto Networks, and Rubrik will benefit from the critical nature of cybersecurity—no matter how AI develops, cybersecurity budgets will remain a high priority.Back-Office Software: Intuit has built a strong moat through a massive data footprint and distribution network. Pegasystems, with its unique AI Blueprint approach, provides core infrastructure for AI workflows and has a special position in the market.

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The above highlights are from Wind Chaser Trading Desk.

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Risk Warning and DisclaimerThe market carries risks, and investment should be approached cautiously. This article does not constitute personal investment advice and does not take into account individual investment objectives, financial circumstances, or needs. Users should consider whether any opinions, views, or conclusions in this article are consistent with their particular circumstances. Investments made accordingly are at one’s own risk. ```