Software and SaaS is a different kind of investment story than semiconductors — less cyclical, more about recurring revenue and margin expansion. Here's the breakdown.BackgroundSoftware (and SaaS specifically — software delivered by subscription over the cloud rather than sold as a one-time license) has become the dominant model for how businesses and consumers buy technology. Estimates of the market's exact size vary quite a bit by research firm depending on methodology, but the direction is consistent. The global SaaS market reached roughly $465 billion in 2026, up from $408 billion in 2025, with the B2B SaaS segment alone accounting for about $492 billion. There are now over 33,200 SaaS companies globally, and 99% of organizations use at least one SaaS application as of 2025.Longer-range forecasts vary between roughly $1 trillion and $1.5 trillion by the early-to-mid 2030s, with one estimate putting the industry at $1.37 trillion by 2035 (12.85% CAGR) and another at $1.48 trillion by 2034 (18.7% CAGR). The spread reflects different definitions of "SaaS" (some include broader cloud infrastructure spend, some don't), but even the more conservative estimates put the industry on a durable double-digit growth path.Why people invest — the core reasons
- Recurring revenue model. Subscription-based software generates predictable, repeatable cash flow rather than one-off sales, which markets tend to reward with premium valuations.
- High margins, low marginal cost. Once built, software has near-zero cost to serve an additional customer — gross margins of 70-90% are common, far above most industries including semiconductors.
- Sticky customer relationships. Enterprise SaaS spending averages $52 million per year per organization, up from $45 million in 2024, and switching costs (data migration, retraining, integration) keep churn relatively low once a product is embedded in a workflow.
- AI as a new growth layer on top of an already-large base. AI software revenue grew from $9.5 billion in 2018 to $118.6 billion in 2025, and vendors are increasingly bundling AI features into existing subscriptions to raise prices without losing customers — a second growth engine layered on the base SaaS business.
- Fastest-growing category of IT spend. Gartner has named software the fastest-growing IT spending category for 2026, with 14.7% year-over-year growth.
- Lower capital intensity than hardware. Unlike chipmakers, software companies don't need to build $20 billion fabs — most capital goes into R&D and sales rather than physical infrastructure, which supports higher free cash flow conversion.
- Diversified access points. Investors can get exposure through mega-cap platforms (Microsoft, Oracle, Salesforce, SAP, Adobe), narrower vertical SaaS names, or software-focused ETFs (e.g., IGV, WCLD).
The gainsRevenue concentration at the top is significant: the top 10 SaaS vendors account for about 35% of total market revenue, with Microsoft leading at $245.1 billion in total revenue for FY2025 and its cloud segment growing 16% year-over-year. Oracle posted $53 billion in revenue with cloud services making up more than 77% of the total, growing 25% year-over-year, and Salesforce draws over 93% of its revenue from subscriptions — illustrating how far the shift to recurring-revenue models has gone even among legacy software vendors. Worldwide public cloud spending, the infrastructure layer underpinning SaaS, reached $723.4 billion, up from $595.7 billion the year before.Risks
- Valuation risk. High-growth software has historically traded at rich multiples of revenue rather than earnings; when growth decelerates or rates rise, these stocks can re-rate sharply downward (as seen in 2022).
- AI disruption to the SaaS model itself. This cuts both ways — AI is a tailwind for incumbents bundling it in, but AI agents and coding tools also lower the barrier for competitors (or customers themselves) to build custom software, potentially eroding the moat of narrower point-solution SaaS vendors.
- Customer app fatigue and consolidation. Companies now use an average of 106 SaaS applications, down 18% from the 2022 peak of 130, as businesses actively consolidate vendors to cut costs — a headwind for smaller, single-purpose SaaS providers.
- Slowing net revenue retention. As markets mature, upsell/cross-sell growth within existing customers (a key growth lever for SaaS) tends to decelerate, forcing more reliance on new customer acquisition, which is costlier.
- Competitive intensity and low differentiation. Many SaaS categories (CRM, HR tech, project management) are crowded, with features increasingly commoditized, pressuring pricing power.
- Interest rate sensitivity. Because much of SaaS valuation rests on cash flows far in the future, these stocks are more sensitive to interest rate changes than more mature, cash-generative sectors.
- Concentration and platform risk. A large share of gains sits with a handful of mega-cap platforms; smaller SaaS names carry higher execution and competitive risk.
Not financial advice — just the factual landscape. If it's useful, I can put together a software/SaaS sector tracker workbook in the same format as your energy and semiconductor ones, splitting out infrastructure/platform (Microsoft, Oracle), applications (Salesforce, SAP, Adobe), and vertical/AI-native SaaS, with valuation and growth metrics.