The SaaS Crash Just Started (What Smart Investors Are Doing Now)

Seth is the Chief Investment Officer at Melody Global, former co-director of portfolio strategy at Enzyme Peak Advisors, and has an MBA from Stanford and an undergrad from BYU. Welcome on.

It's great to be here, Bridger. Yeah, thank you.

Good to have you here. Seth came on in November to our call, and I was like, we got to have Seth back for this AI infrastructure discussion.

Well, it's good to be here with our friends at Fund Launch. It has been such an interesting start to the year. Usually there's some theme that investors are thinking about as Preoccupying their time, their portfolio work. Today we've got more than one that is top of mind for investors.

Well, and to frame today's conversation, I just pulled some simple stats. So if you can share my screen, you'll see, and we're going to talk more about the equities markets. That's where your background's immensely in is running huge portfolios in global macro equities. We've seen this, which is the 2026 SAF sell-off, which is immense. This started essentially around January 28th, 29th. You've seen major brand names get just destroyed in the market at least so far. This is just briefly, we'll bring this closer for you. I can just peek right in there. Does that work? This is, if you can see on my screen here, HubSpot down about 60 to 66%. Wix, you can see the portfolio. Salesforce, Zoom. I mean, these are, These are sticker brand names getting, I mean, in a month and a half to 2 months, absolutely, I mean, beat up. You can see ServiceNow, CrowdStrike, the amount of drawdown they've seen, even Adobe, Intuit, Microsoft, Oracle. So, and I have your slides queued up if you want to get to them at all. But walk us through what's the mindset, what's going on, what's the shift happening? Is it— should it— is this correct? Is it mispriced? What's your take?

Sure. So the 3 themes that investors are really focused on today are what has been popularly termed the SaaSpocalypse, and the military action in Iran, and also what is happening, if you go to this first slide, in private credit. There's a tie between these two. And so if I were to ask you, thinking about what are you most concerned about, you've got the Nasdaq down almost 6% so far year to date. All major US equity indices negative. What are you worried about? And the news flow tends to be focused on what happened yesterday or the day before. The year started with the numbers you just showed with large SaaS names down 20%, 30%, 40%, 50%. But market attention in terms of news flow has moved to Iran and private credit. These are different themes, but which is most important? Let's look at the next slide. If you look at Google and they talk about AI applications and where we are going to see technology transformation in coming years, most of the focus is in the technology sector. And the technology sector is very important. As you see here, this data shows a reclassification of the 4 members of the Mag 7 that do not get classified by GICS as part of the tech sector. So for various reasons, Meta, Google, and Tesla, and Amazon don't show up in tech. They're classified as tech here. The tech market cap in the US is almost $30 trillion, and it dwarfs the other ones. So on the next slide, we can see that as you're thinking about where should you be focusing as an investor today, the materiality of these different themes is remarkable. So if you look at Iran, let's say that you believe that oil prices are going to be higher this year. You could have, let's say in an extreme scenario, a couple percent taken off of US GDP this year. And it's a 40% probability that you have that hit. That's still only a $200 or $300 billion hit to GDP and it could recover after oil prices go back down. Private credit, everyone talking about contagion. John Zito from Apollo saying some of these SaaS names, smaller cap SaaS names could only have 20 to 40% cents on the dollar recovery in a really negative environment, possibly. But you're still only, you know, at a 20% impact write-off, 30%, 40% probability, or it's still a few hundred billion dollars. But the SaaSpocalypse is massive. And that chart, that table you showed at the very beginning shows why. Because if you go back and look at these, if you've got a $27 trillion market cap in US equity exposure that is being viewed by some thinkers as being existentially threatened by AI, it really has an impact. And as those calculations show, that could be 20 times as large if any of those predictions are true compared to what's happening in high rent or private credit.

Very well. And I'll just give you an anecdotal point. So here at FundLaunch, we've got, I don't know, we're about 70 employees total. We're entering— this is the reason for this sell-off is this age of personal software. Meaning we've had like my VP of finance built his, our own finance dashboard using a Claude bot. So, we have about, I think, 6 Claude bots now in the office. We've hired, got Mac Minis running that runs our entire financial system that's essentially replaced the use of QuickBooks.

Hmm.

Now, we still use QuickBooks 'cause we don't wanna, we want, we're running almost double system. We have our own dashboards, own things that we've built and we're testing it out over the last few weeks and it's, Seemingly very good. Actually, in the in the back of the room here is a guy named Christian. He's helped build multiple automations in our marketing materials with Claude Bot, and we're seeing this age of we are building softwares just for ourselves in a matter of he built it in about 24 hours, which is interesting. And and so a lot of investors are going well. I don't know how to price now into it. I don't know how to price HubSpot, so I'm just gonna go to safety and go risk off even with an Iran war. And, or do you think that's a valid concern, or do you think these companies are going to fill the gap and they're going to also develop agentic tools that fill that spot?

So no one knows the answer, but I'll tell you the things I think about in trying to position my portfolio to account for what you've just described. So when moments of rapid change happen, they happen for one of two reasons. First, That there is some kind of discovery, like a drug discovery or, you know, DNA and helix or genomic mapping. And when it happens, it transforms the technology inside an industry almost instantly.

Mm-hmm.

The second thing that can cause rapid and massive technology change is throwing a huge quantity of dollars at a problem. And that R&D will find solutions. So if you look at the next slide, you can see that there's been a lot of talk about silver and the supply constraints there. And we're looking at almost a triple in that silver price in the last 11 months, which is an incredible return for any asset or asset class. But look at what has happened on the next slide in memory prices. So it makes the silver chart look tame.

Mm-hmm.

You've had memory prices quintuple in the past 6 months because of the amount of spending that is going into data centers. And so when you think about what will the long-term impact of AI be, no one knows the answer to that. Everyone's speculating right now. But what you do know is that we're gonna have $500 billion to $1 trillion in CapEx this year going into data centers and downstream spending. And so in the application layer, that $500 billion to a trillion is going to start standing up all kinds of applications, and we are gonna see an explosion in their count and scope like we've never seen in my lifetime.

This is funny. My business partner Dan actually runs computer companies and stuff. He's talked about this immensely. He's like, we— he said, I don't know what to do. Are we— should we buy more inventory? It's gone up 5x in 6 months. I don't— this is such an interesting thing that's happening and it doesn't seem to be slowing down at all. The constraint of just chips, and this is a great example right here, is immense across the board for more compute for data centers. And also, I mean, even just as an anecdotal, just our company, we have— we are essentially doubling the compute power for each person. We're almost adding a Mac Mini or other similar things for that person because of the increased output we're seeing by things like ClaudeBot or Nemo Claw, things like that, that are these AI agents building on an individual device?

It's remarkable. I bought a custom computer. I use a lot of computing power about 3 years ago. I called the same vendor that sold it to me and had him give me a quote on a new one. He said, do you realize that we're selling the computer you bought 3 years ago, those specs, for the same price today as 3 years ago? And so when you're thinking about Moore's Law, It's almost like this surge in DRAM prices has counteracted the increases in engineering efficiency on the chip side. So what does that mean for applications? I think that, I think you've led us to the framing that I would use. And so with—

Next slide?

Yeah, with 2 more slides. When you think about what's gonna happen in the application layer, no one knows, but we do know that AI is gonna continue going from its current use cases to future use cases. The SaaS use cases are in that upper left circle of intangible. And so tech at its core, the— what we're calling AI today is a large language model. And it's important to remember that it's language, it's computer language, and it's functional code that transforms things that we say into a powerful expression. in programs of our intent. And so that's happening today, and that's why you see the 20 to 40% down this year in SaaS names. But it's going to now start going to the financial sphere and to tangible applications like manufacturing. And when you see what's happening in robotics and vehicle automation, autonomous vehicles, it's happening fast, but it's not there yet. So When you're thinking about where to position your portfolio, I think it's a mistake to think that SaaS is an existential threat only for SaaS companies and not think about its impact in the finance and tangible sectors. So here's the checklist I would go through on this final slide in thinking about your portfolio. So AI's going to replace incumbents. Where is it gonna happen first? Where is it gonna happen last? Because you want to get out of the way of the early replacement. I think we can all agree that things like publishing a video game is really easy to do with AI. And so we're likely to see an explosion in the count of small mobile-based games here in the next couple of years, 'cause they're just easy to make now. Just like the authorship and creativity in the short video space.

Short videos, blog posts, things like that.

Blog posts.

Yeah, these are low-hanging fruit. for AI currently. Yes.

Low-hanging fruit.

Yeah.

But as you go down that list, where would you stop? So as you think about, would you let it file your taxes? Maybe. Intuit was down a lot earlier this year. Would it let you choose your relationships? How about design parts for SpaceX or other companies? Would you let it operate on you without human intervention? Would you let it operate nuclear power plants? So when you're thinking about refuge, A lot of people say my drawdown protection is fixed income, but you can find areas inside of equities that are likely to be protected from large AI-driven incumbent replacement for many years to come.

Yeah, what an interesting time it is. And I love this last slide too of like, don't just think it's SaaS. It's also, it's coming for everything. And so be prepared. SaaS is seeing it in the market, In the last few months, especially with Anthropic just announcing a new, essentially a new industry killer. It feels like every week right now.

Every time I see cloud in the news, I just, you know, you just want to push sell because it's going to eviscerate the share price of something that a new cloud module launch is going to compete with.

Well, and in turn, you see this as things become much more efficient. These are deflationary things. You may see an explosion of productivity, but in different places. Right. So you're selling off one place, but then maybe gaining productivity onto the individual or to smaller companies, or you said incumbents are threatened, but new entrants may have a distinct advantage over the next few years.

We talked, I believe last time, about how total factor productivity is one of the driving forces in the economy. And it has been very high in the past century for the US, calculated by some economists about 1.7% a year. The big question still in the macro space is, is this an inflection point in total factor productivity? Because if you have technology to continue driving down costs of providing goods and services, as you just said, it does have a deflationary impact, which creates a lot of interesting, let's say, wargaming with thinking about how the government is going to react in an environment in which they can benefit from the deflationary impact of technology and perhaps be a little bit more aggressive with borrowing and spending. So we would hope to not have that be fully offset by difference in government behavior, but it's a possibility.

Different question for you. We've seen, and then we'll get you outta here, but I wanna ask you about the IPO market. We've seen companies staying private for not just longer, but much longer than previous generations. We have right now queued up a number of large IPOs, a SpaceX, an OpenAI, a Canva, maybe a few others. We've seen some traditional hedge funds buying into private markets or secondaries because they just, they're like, we got to get access to these companies before an IPO. You've seen, and I have a slide later, I won't be able to find it right now, but I just want to, I want to hear your thoughts on these, this IPO market. Do you think that'll actually happen? Do you think they're going to delay another year or two or just not IPO? I'd love to hear your whole take on IPOs, private to public mix. Where do you, where do you think that goes?

It's a great question. So when you look at the IPO market, it has been slower the last few years post-COVID than I would've expected a decade or 15 years ago. And I think that is in part because companies have found that they can raise so much capital while still private that they ask the question, do I really need to deal with the regulatory burden of going public? And yet we're seeing probably a SpaceX IPO this year, which will probably be in the trillion-plus range. And I think that one thing that it's important to remember about IPOs is that you do essentially democratize the ownership of the company. And so for companies that want to have a diversified shareholder base and have a large swath of the economy invested, pun intended, in their success, An IPO still allows you to be in the news and have your shareholder base be part of your success as a company. So I think that we'll have companies selectively say it's worth dealing with the regulatory burden in order to diversify that base.

Yeah, it's an interesting just time in the market for that. And we've even seen some of our portfolio companies getting access to some of these IPO shares, but it's at a $400, $500 billion valuation as a private company. We're trying and we're begging to get shares and we're trying to get in. And it's just an interesting world at that level. $500 billion private company is such a strange number.

There's a lot of regulation changing on this topic. I would not be surprised to see a lot of good work happen in the next 5 years on increasing access to private shares because For many investors, it's something highly demanded. So the market will, and maybe FundLaunch will be part of the solution to that issue.

Yeah, that's very cool. Well, Seth, thank you for coming on today. How, I know you've, your new company is up and running and I don't know if, what are ways people can find you or reach out to you or follow you online? What's a good way for people to, if they want to find you?

We are still pre-launch and building out the technology infrastructure as we speak. So check back with us in a few months. The website will be up and the Tempo Fund will be the first fund that we are launching at Melody Global, and that will be available. I've got docs in my inbox, so we're working on formation, fund formation right now.

That's awesome. Seth, give it up to Seth, everybody in the chat. Give him a virtual round of applause. Well done. Thank you for coming on today. Good to be here today.

Thank you.

Thank you.