Software Stocks: SaaS Industry Soars, But Only the Fittest Will Survive

The software industry is rapidly reducing operating expenses for businesses, resulting in superior earnings growth and stock price performance. Over the last six months, SaaS companies have seen a 13.5% return, surpassing the S&P 500 by 8.6 percentage points.

However, only the best will survive as AI continues to eat into profits of those with lower switching costs. Two software stocks that may struggle in this environment are Salesforce (CRM) and Okta (OKTA).

Salesforce, with a market cap of $148 billion, provides customer relationship management software through its cloud-based platform. Despite having an average billings growth of 10.5% over the last year, it struggled to push its software and might have to lower prices to stimulate demand.

Okta, with a market cap of $24.41 billion, offers cloud-based identity management solutions. Its average billings growth of 10.8% over the last year did not impress, and estimated sales growth of 9.1% for the next 12 months implies slowing demand.

On the other hand, Upstart (UPST), a market cap of $2.59 billion, is an AI-powered lending platform that uses machine learning to assess borrower risk. Its loan originations on its platform are soaring, averaging 56.6% growth over the last year, and it's poised to generate positive free cash flow next year.