Citi: North American Software Sector Shows Steady Growth, AI-Driven Leaders Emerge

Stock News12-22 17:30

Citi's latest analysis of North America's software sector for Q3 2025 reveals reassuring stability. The median revenue compound annual growth rate (CAGR) for over 20 SaaS and infrastructure software firms under Citi's coverage remains steady at 15% for 2024-2026, while the average slightly improved from 15% to 16%. Notably, net revenue retention (NRR)—a key indicator of customer expansion—remained broadly stable. Cloudflare (NET.US) stood out with a 5-percentage-point quarterly NRR jump, the largest increase among peers, while Rubrik (RBRK.US) maintained its exceptional >120% NRR.

Citi highlights that consistent growth trends and the maturation of generative AI/Agentic AI from hype to "strategic necessity" by 2026 could catalyze the sector's next acceleration phase. Profitability metrics remain disciplined: median operating margin (OPM) expansion edged up modestly from 1.0 to 1.2 percentage points, with over half of tracked firms showing no quarterly OPM changes. Post-2023 cost-cutting, most companies now prioritize reinvesting AI-driven efficiency gains into sales/R&D to secure competitive positioning ("a seat at the table"). Sales efficiency metrics corroborate this—median figures held at 0.43 (vs. 0.44 forecast), while the 0.51-to-0.54 average rise stemmed from raised revenue guidance rather than further cost cuts.

**Top Performers**: - **Rubrik** lifted its 2024-2026 revenue CAGR guidance by 2pp to 34%, with OPM and FCF margin forecasts also rising. - **DigitalOcean (DOCN.US)** led sales efficiency gains—its metric surged by 0.23 to 1.95 in 2025 and by 0.38 to 2.37 in 2026, while pulling forward growth targets by a year. - **Fastly (FSLY.US)** staged a turnaround under new leadership: revenue CAGR rose >2pp, NRR rebounded to 106%, and OPM/FCF margins expanded significantly.

**Laggards**: - **Varonis (VRNS.US)** cut its CAGR by 2pp to 14% due to weak on-premise renewals and federal project delays, compounded by plans to sunset self-hosted services by 2026. - **Rapid7 (RPD.US)** trimmed guidance after rare revenue miss.

**Outperformance Trends**: Sector-wide beats improved—average revenue surprises rose to 2.3% (from 1.6%), while profit beats widened to 2.8pp (from 2.3pp). Standouts included Check Point (CHKP.US), with billings 11% above estimates (fastest YoY growth since 2012), and Fastly’s 4.8% revenue/6.6pp OPM beats. Rubrik’s 17pp OPM beat led the cohort, marking its first profitable quarter.

**Investment Takeaways**: Citi reaffirms preference for scaled, efficient platforms—**Datadog, CrowdStrike, Zscaler** (growth leaders), **Atlassian** (operational excellence), and **Rubrik/Cloudflare** (execution strength). The report underscores 2026’s AI inflection point: competition will shift from incremental experimentation to platform dominance, favoring firms with entrenched customer bases, tech stacks, and cash reserves. Investors are advised to focus on established leaders poised to leverage AI tailwinds, rather than speculative turnaround plays.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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