What history tells us about recession impact on software stocks

Investing.com -- Software stocks have historically responded to recessions with mixed resilience, shaped largely by business model and end-market exposure. 

Bernstein analysts, in a recent note, examined the 2008–2009 financial crisis and more recent economic scares to understand how software companies might perform in another downturn.

During the Great Recession, subscription-based cloud software firms (SaaS) proved more resilient than traditional license-based software vendors. 

Cloud companies maintained positive growth through most of the downturn, rebounding faster than peers who relied on upfront sales and maintenance contracts. 

SaaS models benefited from being operational expenses rather than capital ones, more manageable for IT budgets during spending cuts.

Bernstein grouped traditional vendors into five categories based on their recession performance. 

Some saw minimal disruption, others flattened or slowed for a year, while a few were effectively pushed out of the market. 

License-heavy firms tied to recession-sensitive industries like financial services or automotive were most affected. 

In contrast, providers serving stable verticals such as education, healthcare, or finance (e.g., accounting software) performed comparatively better.

SaaS vendors also fell into three profiles. Companies offering mission-critical or cost-saving applications often continued growing. 

Those focused on areas like recruiting, marketing, or SMBs saw flat growth that recovered after the recession ended. Only a few, closely tied to distressed sectors, experienced actual revenue declines.

Not all recurring revenue is equally stable. Consumption-based pricing, such as that used by Twilio (NYSE:TWLO) or Okta (NASDAQ:OKTA), is more vulnerable during economic slowdowns as usage declines. Vendors with seat-based pricing tied to enterprise users fared better.

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Bernstein notes today’s software industry is better positioned structurally. Most companies have already streamlined operations post-COVID, and IT budgets have shifted toward efficiency rather than expansion. That may mean less downside risk compared to 2008.

Stock-based compensation (SBC), a potential investor concern during downturns, did not shift significantly toward cash during the GFC or post-COVID period. 

Operating expenses as a share of revenue remained stable, indicating no broad pressure to convert equity incentives into cash outlays.

Valuations, however, did suffer during the GFC. SaaS market caps dropped nearly 50% from peak to trough but recovered within 18 months. 

Traditional vendors took more than three years to recover. This divergence, Bernstein suggests, reinforced the long-term investor preference for SaaS models and may have accelerated the industry’s transition to the cloud.

Similarly to cloud adoption in 2008–2009, generative AI could emerge as a recession-era accelerator. 

Despite high costs and implementation challenges, a downturn may push enterprises to replace headcount with automation to preserve capacity, advancing GenAI projects.

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