AI Baby, SaaS Bathwater. And a Price Hike.

research update

Hello,

As Pernas Research pointed out last Thursday, SaaS companies are down 27% YTD, while the S&P 500 is roughly flat. I guess his dataset covers U.S.-listed names with at least a $1B market cap. The performance looks even worse in small and micro-caps—and worse still in Japan.

Whether you’re new to SaaS or have been investing in the space for a decade, you’re probably feeling some level of pain/panic. Instead of thinking about which setups offer the highest IRR, you’re asking which ones are least likely to be disrupted by Anthropic. That is assuming you’re still invested at all.

I’d guess many aren’t even trying to assess what’s probable anymore, but are defaulting to worst-case scenarios and concluding the space simply isn’t investable. I don’t blame them. Seeing a stock get cut in half that I once considered “asymmetric” would—and does—make me react the same way.

That said, in environments like this, if you can separate the baby from the bathwater and avoid throwing both out while keeping the baby at a cheap price, there are likely riches to be made.

I wouldn’t consider myself a SaaS expert, or an expert on AI disruption. But I think I have found a case where Japanese investors have thrown a company into the “sell SaaS because of AI” bucket, even though AI is actually a big positive.

In fact, I wouldn’t really call it SaaS at all. It’s a data platform. Customers pay a subscription to access a proprietary database built from primary data. In this case, AI isn’t a threat—it’s a way to extract more value from that data. And that’s exactly what management has recently made its core focus.

More importantly, in last week’s earnings release the company announced its first price increase for existing customers in its 25-year history. The hike is meaningful and, as you’d expect, should flow entirely to margins. In most environments, that kind of news would be rewarded with a 10% or 15% post-earnings pop. Here, the stock was up less than 3%.

In the research below, I explain why I see AI as a tailwind to the company’s value proposition, what I think the price increase will mean for the financials, and why I believe it could be trading at roughly 3.9x to 4.6x EV/EBIT two years out.

Even if I’ve overestimated the pricing impact and underestimated churn, the stock is still trading at about 6.2x LTM EV/EBIT. And this is based on earnings generated in what is likely the worst end-market environment since the GFC. That’s for a business that has compounded EBIT at 18.3% over the past 20 years, 17.6% over the past 10, and delivered an average ROE of 27%.

I don’t think many are paying attention to this. The only reason I noticed it is because I’ve been following the company for some time.

So without further introduction, let’s dive in.