Investors are back on the SaaS circuit! UBS: Valuation is already attractive to focus on these three types of US stock growth opportunities

The Zhitong Finance App learned that after more than a year of cautious sentiment, investors' interest in SaaS (software as a service) and applications is gradually picking up. Some high-quality companies are expected to achieve differentiated growth in 2026, but the overall recovery of the industry is still limited by factors such as budget constraints.

UBS pointed out in the report that investors were cautious about the SaaS sector in the past year due to factors such as disruptions in artificial intelligence (AI) technology and concerns about market maturity. Recently, however, the growth acceleration signals issued by companies such as HubSpot (HUBS.US) and CRM.US (CRM.US), compounded factors such as excessive market concerns about terminal risks in the industry and the appeal of SaaS valuations compared to the overall software industry due to partial liquidation of AI-related transactions, prompted investors to refocus on opportunities to grow in this field. Feedback from IT executives collected by UBS through a recent virtual event also showed that the fundamentals of the industry were better than initial expectations, there was no large-scale replacement of existing suppliers, AI-driven layoffs were also limited, and some SaaS companies are still expected to participate in the growth opportunities brought by AI.

Looking ahead to 2026, UBS has summarized six core trends in the SaaS industry and is optimistic that some companies will show significant differentiation next year.

On the demand side, UBS believes that IT budget growth will be moderate next year. It is expected to remain flat or increase slightly year-on-year in 2026, and spending pressure still exists. AI, cloud infrastructure, and data-related initiatives are still the focus of investment, and non-AI application modernization projects are under pressure to integrate and rationalize expenses. However, the most difficult stage of the license optimization cycle in the post-pandemic era has basically passed. This reflects the fact that the net revenue retention rate and number of new customers of SaaS companies have remained stable in recent quarters, and the revenue growth of SMEs improved significantly in the third quarter of 2025.

Staff growth remains a challenge for the industry. According to ADP data, personnel growth in companies with 50 or more employees remained low in single digits, while companies with 50 or less employees remained flat and declined slightly in November. Recruitment activity is expected to continue to be sluggish in 2026, but there will be no large-scale layoffs. This pressure is mainly due to the macro environment rather than AI technology. According to the UBS AI survey, 40% of respondents believe AI will increase personnel requirements, and only 31% expect a decrease. However, there are early signs of AI replacement in the customer service sector. A large telecom operator's self-developed AI replaced 1-2 customer service agents. A hotel group reduced customer service staff by 10% in 2025 and plans to reduce it by another 30% in 2026.

The upgrading of the pricing model has become an important direction of change in the industry. SaaS companies are gradually getting rid of pricing logic based solely on “seats”, and pricing models based on usage or transaction volume are showing stronger short-term growth potential. In this context, cross-selling, AI application implementation, and pricing strategy adjustments will become key drivers of enterprise growth, and many leading application vendors plan to implement substantial price increases in 2026.

AI proxy applications will accelerate penetration in 2026. Currently, AI is most commonly used in scenarios such as productivity tools, code generation, service support, and creative content generation, focusing mainly on automating low-end repetitive tasks. Due to issues such as data preparation, technical maturity, and compliance and security, large-scale application of AI in key business processes is still in the early stages. Only 17% of respondents have deployed AI projects on a large scale, and 5% of enterprises have implemented large-scale application of AI agents. However, this trend is expected to improve significantly in 2026, and large-scale production deployments are expected to begin in the second half of 2026 to 2027.

Self-service AI solutions (DIY) will continue to be popular, but are mostly focused on specific areas. UBS believes that companies prefer to independently develop AI solutions for specific industry scenarios (such as claims processing, fraud detection, agricultural digitalization, etc.) or internal processes (such as knowledge base AI enablement, back-office process automation, etc.). Most of these scenarios are new markets, have little overlap with existing SaaS vendors, and AI does not replace core business systems, but rather complements them. IT executives are open to AI solutions from SaaS vendors, and demand for customer-facing front-office applications is higher than back-office applications.

Vertical SaaS companies have more room to migrate to the cloud. Vertical application providers serving industries with slow modernization processes such as construction, manufacturing, and government (such as Autodesk (ADSK.US) in the construction manufacturing sector and TYL.US (TYL.US) in the government sector) still have plenty of opportunities to migrate from local deployment to the cloud. Modernization in the ERP and supply chain sector also has plenty of room for growth. Overall, the SaaS industry has entered an advanced stage of growth, but short-term growth opportunities in the front office/CRM sector, especially AI-related opportunities, are superior to back-office fields such as human resources and traditional non-cloud applications.

In terms of valuation, the market generally expects revenue growth in the SaaS/application industry to slow slightly in 2026, but UBS believes that if growth can be maintained at 2025 levels and some companies accelerate, current valuations are attractive. According to the data, the average EV/s (enterprise value/sales) ratio of SaaS/application companies with a market capitalization of less than 50 billion US dollars is 5 times, and the average EV/FCF (enterprise value/free cash flow) ratio of enterprises with a market capitalization above 50 billion US dollars is 22 times, all lower than the 7-year average (10 times and 36 times, respectively), reflecting current expectations of low double-digit growth in the industry. However, the profitability of the industry has improved markedly, and under the assumption that growth is stable and the deceleration trend is basically over, there is an upward potential for current valuations.

In terms of specific targets, UBS is optimistic about three types of companies: companies that use non-seat or usage-based pricing models, such as Braze (BRZE.US), Twilio (TWLO.US), Amplitude (AMPL.US), companies with clear company-specific growth catalysts (HubSpot), and vertical leaders (Autodesk) with more attractive valuations. Currently, UBS gives AMPL, ADSK, BRZE, HUBS, and TWLO a “buy” rating, and CRM a “neutral” rating.