An AI-Resistant SaaS Moat at a Discount

The market slashed this software compounder's multiple over terminal value panic. They forgot about the bureaucratic moat protecting its cash flow.

A few years ago, it seemed that nothing could stop software-as-a-service (SaaS) companies.

Armed with capital-light models and high switching costs, software multiples expanded under the assumption that these economics would last forever.

Then AI arrived. As AI abilities - or perhaps more accurately, the perception of AI abilities - rapidly grew, investors started to question the sustainability of SaaS business models.

• Could a customer just internally develop comparable software at a fraction of the cost?

• Could a well-funded startup, armed with modern AI tools, simply code its way around an entrenched incumbent in months rather than years?

• Does this new reality shift bargaining power away from software companies and to the customer?

For many SaaS businesses, these are questions without easy answers. Terminal value drives valuation and SaaS terminal values have become more difficult to underwrite with confidence.

The company I’m writing about this quarter is one of those SaaS businesses that saw its multiple slashed in the last 18 months, but its structural moat has arguably never been cleaner.

This company’s moat was never primarily about the quality of its code, which AI could replicate. Its moat is instead anchored in something far more durable, and far more boring, than that.