The current downturn in software stocks is driven by two main factors: rising interest rates and the impact of AI on business models. Higher interest rates lower the present value of future cash flows, which is particularly harmful for software companies that rely on long-duration revenue. For example, a shift from an 8% to a 12% discount rate can reduce the expected revenue multiple from 5.0x to 2.78x, without any changes to the business itself. This change pressures companies to focus on cost management and profitability, especially when market conditions no longer support growth at any cost. AI is reshaping the SaaS landscape by challenging core assumptions about pricing and cost structures. Traditionally, software companies bill based on the number of seats, which aligns with the unit of labor. However, as AI enhances productivity, companies might need significantly fewer seats, leading to revenue loss even if they raise prices. For instance, if a company raises its price per seat by 25% but reduces the number of seats by 40% due to AI efficiency, it could still face a substantial revenue drop. This shift forces companies to rethink their pricing strategies, moving away from seat-based models towards outcome-based pricing, which complicates customer relationships. Moreover, AI introduces variable costs into a sector designed for fixed costs. Companies must now account for the costs associated with AI interactions, which can quickly erode profit margins if not managed carefully. A support rep using AI frequently could hit cost thresholds that require a reevaluation of pricing strategies. As AI tools become standard, companies may struggle to pass these costs onto customers, risking margin compression. Simultaneously, the SaaS market is seeing a trend towards rebundling, where larger platforms incorporate AI capabilities that threaten smaller, standalone solutions. This consolidation pressures companies to defend their market positions and adapt to a rapidly changing environment where traditional SaaS economics are under threat.