1) In yesterday's e-mail, I analyzed Software as a Service ("SaaS") provider ServiceNow (NOW) through my "first look" lens.
My team and I did a deep dive on the company in Stansberry's Investment Advisory last month, after the stock had been nearly cut in half. (If you're not already a subscriber, you can become one by clicking here.)
Despite the company's strong financials, the stock has continued to fall since then. One of the main reasons for that is the "SaaSpocolypse"...
This refers to the investor panic around SaaS companies, driven by fears that artificial intelligence ("AI") will severely impact their businesses.
As my team and I discussed at length last month, we think the sell-off in software stocks is overdone, which is creating wonderful investment opportunities. It's worth repeating some of what we wrote then before diving back into ServiceNow...
We highlighted why we don't think companies are likely to rip out mission-critical software in favor of AI:
Major companies choose big software vendors with established reputations because they can trust them. They want someone they can rely on.
No less important, they want someone to blame when things go wrong. In the business world, folks call this "one throat to choke."
If you're an executive who cheaps out by developing software internally or switching to an unknown startup, you'll shoulder the blame if things go wrong. You'd rather deal with a big company with deep pockets... round-the-clock customer service... proven data security... and the staying power to still be in business in five years.
We think AI will prove to actually be a good thing for many software companies, as it expands markets and creates new ways to profit:
AI will do what SaaS did for the software market 20 years ago... grow the software pie. It will make software available to far more companies and embed it deeply into more business processes.
That doesn't mean every software company will survive this rapid AI transition. It will be painful for some. But still others will do better than ever. The problem is, the market hasn't figured out which is which.
So my team and I developed a proprietary framework for evaluating software companies – including their resilience against AI:
[We] started by evaluating all 258 publicly traded software companies against 12 criteria. These included things like whether software is a "system of record" that controls proprietary customer data, has embedded workflows and can "talk" to other software programs, has high switching costs, and is a platform rather than simply a user interface...
Large SaaS platforms that have proprietary customer data, years of usage patterns, and embedded workflows will survive. Companies that make nothing more than a slick user interface or a fancy dashboard are toast.
Simple applications can be swapped out. Other types of software are so embedded, they're like connective tissue – very hard to replicate and replace.
Then we applied a scoring system:
With the help of AI, we scored each company on all 12 criteria on a scale of 1 (highly vulnerable to AI substitution) to 10 (structurally resistant).
We weighted the 12 factors by importance. We then took the weighted average of the grades to rank which companies are most durable... and which are most at risk. The higher the score, the more resilient the company is. The lower the score, the more vulnerable.
In last month's issue, we shared a list of the 20 software companies with the highest score – meaning they're the least vulnerable to the threat of AI.
The full list is only available to our subscribers. But I can share the top six at the time of the issue's publication here:
- Microsoft (MSFT)
- Veeva Systems (VEEV)
- Salesforce (CRM)
- Nice (NICE)
- Fair Isaac (FICO)
- ServiceNow
I'm proud to say that we recommended Microsoft in Investment Advisory more than 14 years ago and have never wavered in our conviction. Subscribers who followed our advice and held on have earned gains of 1,370%.
I was also pleased to see Salesforce scored so highly. I've written about the company many times – most recently on March 18, when I concluded:
... this is a great business with a bright future. If anything, it will likely benefit from AI. It has one of the most aggressive share repurchase programs I've ever seen. Yet the stock trades at a mere 12 times trailing free cash flow. That's compelling.
ServiceNow was ranked sixth among the 258 companies we evaluated, putting it in the top 2.3%.
As we explained in the issue, the biggest reason my team and I like the company is because its software is positioned to benefit the most from the shift to agentic AI. And the stock today is the cheapest it has ever been.
I'll go into more detail on both of these topics tomorrow, so stay tuned...
2) The Wall Street Journal just published a bombshell story that reinforces what I've been saying for months: ChatGPT maker OpenAI is in big trouble.
According to the article, the company missed its own targets for new users and revenue for the most recent quarter. And that has raised concerns about its massive spending:
Chief Financial Officer Sarah Friar has told other company leaders that she is worried the company might not be able to pay for future computing contracts if revenue doesn't grow fast enough, according to people familiar with the matter.
Board directors have also more closely examined the company's data-center deals in recent months and questioned Chief Executive Sam Altman's efforts to secure even more computing power despite the business slowdown, the people said.
The spending scrutiny is constraining Altman's once-boundless ambitions ahead of a potential initial public offering that could take place by the end of the year. Friar and other executives are now seeking to control costs and instill more discipline in the business, at times putting them at odds with their CEO, people familiar with the issue said.
OpenAI's troubles are even more stark given that usage of AI is exploding, as this X post from Charles Schwab Chief Investment Strategist Liz Ann Sonders shows:
I think there's a good chance that OpenAI will end up like WeWork, with a failed IPO and implosion of the company.
But the fallout would be much greater, given that WeWork's peak valuation was "only" $47 billion... whereas OpenAI just closed its latest funding round at an $852 billion post-money valuation.
If I'm right, many companies' stocks will be impacted – starting with Oracle (ORCL). It signed a deal in September for $300 billion to provide OpenAI with data-center compute power for five years starting in 2027.
But if OpenAI implodes, Oracle can say goodbye to that deal.
3) Hardly a day goes by that I don't read about some new scam, typically targeting elderly Americans...
It's so pervasive and lucrative that it has become a major driver of the economy of Cambodia, as this WSJ article details:
Predominantly Chinese syndicates operating in Cambodia have grown so enormous in scale that some foreign politicians refer to the country of 18 million people as "Scambodia"...
A report last year by an expert in Cambodia-based scam networks that was cited by U.S. authorities estimated annual revenue from scam syndicates was as high as $19 billion – equivalent to nearly 40% of the country's gross domestic product and outstripping its largest formal sector, garment manufacturing.
Americans alone lost $10 billion to online fraud originating from Southeast Asia in 2024, according to U.S. government data. That figure represented a 66% increase from the previous year.
Be careful out there!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.