Investors are returning to the SaaS track! UBS: Valuations are attractive, focus on these three types of growth opportunities in US stocks.

UBS Group AG released a research report stating that after more than a year of cautious sentiment, investors' interest in the SaaS (Software as a Service) and application fields is gradually recovering. Some high-quality companies are expected to achieve differentiated growth in 2026, but the overall industry recovery is still constrained by factors such as budget constraints. In the report, UBS Group AG pointed out that in the past year, investors have been cautious about the SaaS field due to factors such as AI technology disruption and market maturity concerns. However, recent signals of accelerated growth from companies such as HubSpot (HUBS.US) and Salesforce, Inc. (CRM.US) have combined with market concerns about industry end-risk excess and the closure of AI-related transactions to make SaaS valuations relatively attractive compared to the overall software industry, driving investors to reconsider long opportunities in this area. Feedback from IT executives collected through recent virtual events also shows that the industry fundamentals are better than initially expected, there has not been a large-scale replacement of existing suppliers, AI-driven layoffs have also been limited, and some SaaS companies still have the opportunity to participate in the growth opportunities brought by AI. Looking forward to 2026, UBS Group AG summarized six core trends in the SaaS industry and is optimistic that some companies will demonstrate significant differentiation next year. On the demand side, UBS Group AG believes that next year's IT budget growth will be moderate, and is expected to remain flat or slightly increase year-on-year in 2026, with spending pressure still present. AI, cloud infrastructure, and data-related initiatives remain key investment areas, while non-AI modernization projects face integration and rationalization pressures, but the most difficult phase of post-pandemic license optimization has basically passed, reflected in the stable net revenue retention rates and new customer numbers of SaaS companies over the past few quarters, with revenue growth for small and medium-sized enterprises showing significant improvement in the third quarter of 2025. Workforce scaling remains a challenge for the industry. ADP data shows that the growth in the workforce of companies with 50 or more employees remains in the low single digits, while companies with fewer than 50 employees are basically flat and slightly declined in November. Recruitment activity in 2026 is expected to continue to be sluggish, but there will not be large-scale layoffs. This pressure is mainly due to macroeconomic conditions rather than AI technology, with the UBS Group AG AI survey showing that 40% of respondents believe that AI will increase demand for personnel, while only 31% expect a decrease. However, early signs of AI substitution are already evident in the customer service field, with a large telecommunications operator using self-developed AI to replace 1-2 level customer service agents, a hotel group reducing customer service personnel by 10% in 2025, and planning to reduce by another 30% in 2026. Upgrading pricing models is becoming an important industry transformation direction. SaaS companies are gradually moving away from pricing logic based solely on "seats," and pricing models based on usage or transactions show stronger short-term growth potential. In this context, cross-selling, AI application landing, and pricing strategy adjustments will be key drivers of enterprise growth, with several leading application suppliers planning to implement substantial price increases in 2026. The penetration of AI agent applications will accelerate in 2026. Currently, AI is most commonly applied in productivity tools, code generation, service support, and creative content generation scenarios, focusing mainly on automating low-end repetitive tasks. Due to issues such as data preparation, technological maturity, and compliance security, large-scale application of AI in key business processes is still in its early stages, with only 17% of respondents having deployed AI projects on a large scale, and 5% of companies achieving large-scale AI agent applications. However, this trend is expected to improve significantly in 2026, with large-scale production deployments expected to start in the second half of 2026 to 2027. Self-service AI solutions (DIY) will continue to be popular, but mainly in specific areas. UBS Group AG believes that companies tend to develop AI solutions for specific industry scenarios (such as claims processing, fraud detection, agricultural digitization, etc.) or internal processes (such as knowledge base AI empowerment, back-end process automation, etc.), which are mostly new markets with low overlap with existing SaaS vendors, and AI does not replace core business systems, but rather supplements them. IT executives are more open to AI solutions from SaaS suppliers, with higher demand for customer-facing applications than back-end applications. There is greater cloud migration space for vertical SaaS companies. Vertical application suppliers serving industries with slower modernization processes, such as construction, manufacturing, and government (such as Autodesk, Inc. in construction and manufacturing, and Tyler Technologies, Inc. in government), still have ample opportunities to migrate from on-premise to the cloud. There is also significant growth potential in the modernization of ERP and supply chain fields. Overall, the SaaS industry has entered the late growth stage, but short-term growth opportunities in the front-office/CRM field, especially AI-related opportunities, are better than in back-office areas such as HR and traditional non-cloud applications. In terms of valuations, the market generally expects a slight slowdown in revenue growth in the SaaS/application industry in 2026, but UBS Group AG believes that if growth can maintain 2025 levels and some companies achieve acceleration, current valuations are attractive. Data shows that SaaS/application companies with a market capitalization below $50 billion have an average EV/S (Enterprise Value/Sales) multiple of 5, while companies with a market capitalization above $50 billion have an average EV/FCF (Enterprise Value/Free Cash Flow) multiple of 22, both below the 7-year average (10 and 36 times, respectively), reflecting expectations of low double-digit growth in the industry. With industry profitability significantly improved and assuming the trend of stable growth and the end of the deceleration, current valuations have upward potential. In terms of specific targets, UBS Group AG is bullish on three types of companies: those that adopt non-seat-based or usage-based pricing models, such as Braze (BRZE.US), Twilio (TWLO.US), Amplitude (AMPL.US), companies with clear enterprise-specific growth catalysts (HubSpot), and vertical industry leaders with more attractive valuations (Autodesk, Inc.). Currently, UBS Group AG has a "buy" rating on AMPL, ADSK, BRZE, HUBS, TWLO, and a "neutral" rating on CRM.