The fear about how agentic artificial intelligence (AI) is making software-as-a-service (SaaS) companies obsolete is real. Many SaaS stocks have tanked over the past year, and these companies are trying to step up their models to remain relevant in an AI world.
The fear has reached SaaS powerhouses ServiceNow (NOW +14.58%) and Palantir Technologies (PLTR +9.29%), and their stocks are down 33% and 23% this year, respectively. But agentic AI may not be the threat to these companies that some investors are worried it will be. Here's what you need to know.
Image source: The Motley Fool
What is agentic AI?
SaaS has become the go-to model for software companies, providing recurring revenue through monthly subscriptions. Clients don't get a one-time package that can become obsolete over time but an ongoing relationship with upgrades. SaaS can cover everything from Salesforce's marketing software to Figma's graphic design and Microsoft's Word.
Agentic AI allows the client to automate many of the actions an SaaS program does, making it superfluous. In a case of a subscription that acts as a database, for example, which still needs human interaction to analyze data and take action, the agent can add data, analyze it, and create marketing campaigns based on it.
How does SaaS play into agentic AI?
The SaaS stocks that are hurting the most are the legacy kind. These are companies that have been around for years and are based on older technology. Although everyone is scrambling to keep up with AI, even if these companies switch to an AI profile, their services will be less in demand precisely because their models become more efficient. In other words, they can perform more work faster, needing fewer "seats," or subscriptions.
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ServiceNow and Palantir are both AI-based, and their businesses already handle much of the work an agent would. ServiceNow launched its Control Tower last year, before the market started worrying about agentic AI. As the name implies, it's a "centralized command center" to manage a company's AI program.
Even if agentic AI handles many software applications, it still needs to be unified for maximum efficiency and value, and that's where ServiceNow comes in. The company has thousands of clients with long-standing relationships, giving it exposure to further deepen their dependency on its platform.
It's similar for Palantir, which not only unifies disparate datasets but also sends trained engineers to clients to map out its ontology and create a customized system to pull the most actionable insights. Its government and commercial contracts span years, and it's already deeply embedded in their systems. These are advantages that can't simply be replaced by agents and give them a leg up.
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As companies rely more on agents, they'll need platforms like Control Tower and Palantir's Artificial Intelligence Platform (AIP) to manage them, creating compelling long-term opportunities.
A word of caution
Both ServiceNow and Palantir are high-growth, profitable companies that are demonstrating strength despite the SaaS stock rout. However, that doesn't necessarily mean they're screaming buys right now, and that's because of one very important factor: valuation. They trade at 61 and 154 times trailing-12-month earnings, respectively, even at their lower prices.
While they may have long growth runways, their upside may be limited by their current price.