The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Karen Kwok

LONDON, Aug 22 (Reuters Breakingviews) - Venture capitalist Marc Andreessen claimed in a famous 2011 essay that software was eating the world. Fourteen years later, yesterday’s disruptors now risk being consumed themselves. Stock valuations may not fully reflect the possible pain that artificial intelligence could cause for "software as a service" (SaaS) companies.

These groups typically sell cloud-based subscription products to corporate clients. Boutique investment bank Software Equity Group maintains the SEG SaaS Index. Among its 100-plus constituents are $236 billion Salesforce CRM.N, which helps enterprises manage their customer relationships, and $150 billion Adobe ADBE.O, which sells tools for e-commerce firms, marketers and creative professionals. Investors over the years flocked to the cohort’s enticing combination of recurring revenue and fast growth, pushing valuations to toppy levels in the 2021 boom.

Yet growth has since slowed. Current constituents of the SEG SaaS Index on average boosted their top lines by more than 20% in 2021 and 2022, according to a Breakingviews analysis of LSEG data available for 73 of the companies. Average growth will slip to 9% this calendar year, based on analyst forecasts. The pandemic-era boost to corporate software spending has proven short-lived.

The newer risk on the horizon is AI. Startups armed with large language models, which produce computer code instantaneously, can in theory build cheaper, faster and more specialised tools. That gives customers more choice – and reasons to delay signing contracts with incumbent SaaS players. The spectre of the “death of software”, with AI as its killer, is haunting markets. Last week a 30% post-earnings stock drop for Monday.com, a $9 billion company that sells project-management tools, prompted a broader software selloff that spread to Europe.

Even some of the biggest names may be at risk. Take Adobe. Melius Research analysts reckon that video-production tools from Alphabet GOOGL.O and OpenAI could compete with the San Jose-based group's software that helps marketers create campaigns, making it harder to defend or grow its market share.

SaaS incumbents still have advantages. They can, for example, embed AI into their existing systems to head off the new entrants. But this too has a downside. The new AI wave seems to be prompting a shift away from typical SaaS contracts based on numbers of users or “seats”. Companies like Salesforce are introducing usage-based pricing, such as “Flex Credits”, which some startups are offering too. That departs from the traditionally predictable SaaS contract model beloved by investors, potentially ushering in a more volatile era.

Valuations haven't fully digested the AI threat just yet. The SEG SaaS Index’s median forward revenue multiple is 4.3 while the mean is 5.3. Both are well below the pandemic-era peak but nearly unchanged since ChatGPT launched in November 2022. In other words, the full extent of the pain is yet to come.

Follow Karen Kwok on LinkedIn and X.

(Editing by Liam Proud; Production by Streisand Neto)

((For previous columns by the author, Reuters customers can click on KWOK/karen.kwok@thomsonreuters.com))