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Zoom and CrowdStrike stocks ride SaaS’s AI trend

SaaS companies are increasingly turning towards AI-driven innovations to power the future development of their products. Zoom, for example, recently incorporated OpenAI’s technology into Zoom IQ. While CrowdStrike’s product combines SaaS, AI and cybersecurity, three growth trends, it could face challenges to long-term growth from Microsoft’s expanding footprint in all three fields.

- SaaS companies are harnessing the power of AI to transform their futures.

- CrowdStrike combines both in security product, though Microsoft looms over its growth projections.

- The Spear Alpha ETF is up 19.6% year-to-date.

Artificial intelligence (AI) is transforming software as a service (SaaS) products, with the technology seen as key to the industry’s future.

With its cloud-hosted, AI-based cybersecurity product, CrowdStrike [CRWD] sits at the confluence of these two themes, as well as the third major megatrend, that of cybersecurity. CrowdStrike stock is up 7% in the past month and up 23.3% year-to-date.

Meanwhile, Zoom [ZM] is bringing AI capabilities to its cloud-hosted video conferencing software. In late March, the company announced a partnership with OpenAI, the maker of ChatGPT and DALL-E, to add the capacity to generate summaries and draft messages to its AI-powered assistant Zoom IQ.

The transformative potential of the meeting place between AI and SaaS is demonstrated by Nextech3D.ai [NEXCF], which reported a 963% increase in user numbers since the start of the year, following the beta launch of its AI-powered CAD-to-3D Design Platform, Toggle3D.

Zoom’s share price is up 1.9% over the past month and up 3.3% year-to-date. Nextech3D.ai is down 9% and 23.4% over the respective periods.

Microsoft’s long shadow

With 67% average revenue growth over the last three years, CrowdStrike is demonstrating rapid growth while already being profitable on a non-GAAP basis.

However, it is possible that Microsoft’s [MSFT] increasing presence in the AI and cybersecurity spaces is acting as a squeeze on CrowdStrike’s growth prospects.

CrowdStrike’s third quarter (Q3) results showed a slowdown in revenue growth and included a lacklustre forecast. At the time, this was attributed to cost-cutting by CrowdStrike’s clients, but analysts such as Joshua Tilton of Wolfe Research have since pointed to Microsoft’s “significantly improved” security offering as a headwind for CrowdStrike.

Indeed, as a large investor in OpenAI, Microsoft’s shadow looms large over many of the upcoming developments in the SaaS and AI industries. It recently completed one of the largest cloud migrations in consumer goods history: along with Accenture [ACN], it transformed Unilever [ULVR.L] into a cloud-only company.

An aspect of this was incorporating Microsoft’s Azure OpenAI Service “across Unilever’s business to drive increased automation, enabling better customer and employee experiences”.

Global innovation

While much of the high-profile innovation in AI and SaaS stems from the US, countries across the globe are positioning themselves to embrace the trend.

In India, venture capital fund Iron Pillar has secured $129m to invest into Series B and C cloud start-ups.

“The global cloud opportunity is growing at an unprecedented pace,” said Iron Pillar’s managing partner Anand Prasanna in a statement. India’s slice of that global pie could be worth $13 billion by 2026, according to research from International Data Corporation.

Elsewhere, one of the largest information technology companies in the United Arab Emirates and Saudi Arabia, Emircom, has selected Palo Alto-based SymphonyAI as its AI SaaS partner. The agreement will deploy SymphonyAI’s software to Emircom’s customers throughout the Middle East, affording them access to a range of AI-driven enhancements to service and manufacturing operations.

According to ReportLinker, the global SaaS market is set for 6.6% CAGR between 2023 and 2027. Meanwhile, data from Precedence Research suggests that the global AI market will grow at 23% CAGR between 2023 and 2032.

Funds in focus: Spear Alpha ETF

While no ETFs specifically cover the intersection between AI and SaaS, there are various options for investors seeking exposure to both themes.

The Spear Alpha ETF [SPRX] lists AI as well as “enterprise digitalization”, which centres around cloud migration, among the themes in which it invests. These themes are among six related to “breakthrough trends in industrial technology”, with the other four being automation and robotics, environmental focus and decarbonisation, photonics and additive manufacturing, and space exploration.

As of 12 April, CrowdStrike is SPRX’s sixth largest holding, with a 4.97% weighting. The fund also holds Zoom, with a 4.01% weighting. Top three holdings Nvidia [NVDA], Cloudflare [NET] and Snowflake [SNOW] are all directly relevant to the AI and/or SaaS spaces.

SPRX is up 6.7% in the past month and up 19.5% year-to-date.

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