After a sharp valuation de-rating, Vertical SaaS and HealthTech enter a stock-picking phase
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After a sharp valuation de-rating, Vertical SaaS and HealthTech enter a stock-picking phase
The sector has materially underperformed the S&P 500 year to date, but earnings-based valuations have fallen significantly; J.P. Morgan remains positive on vertical software companies with industry barriers, strong retention, and clear paths to profitability.
- The S&P 500 is up 13% year to date, while the market-cap-weighted return of the covered portfolio is -10%, with only three companies outperforming the index.
- Valuations for the covered sector have declined from 10x EV/sales and 38x EV/EBITDA in August 2025 to the current 5x and 14x.
- Fundamentals are most positive in financial services and digital banking; commercial real estate is improving from low levels, while HealthTech fundamentals show both improving hospital trends and AI investment weighing on margins.
- With specialization, high barriers to entry, high switching costs, and strong customer retention, vertical software still has the potential to command a valuation premium over horizontal SaaS over the long term.
- Insurance and non-residential construction-related indicators are relatively weak, requiring attention to premium growth, auto claims frequency, and changes in construction activity.
Report interpretation
Overview
This report systematically reviews the market performance, valuation changes, revenue growth, profitability, and downstream industry conditions of U.S. small- and mid-cap Vertical SaaS and HealthTech companies. The research covers verticals including financial services, digital banking, real estate, SMBs, insurance, industrial and construction, HealthTech, and customer relationship management, while also discussing stock opportunities in the context of the macro environment and the impact of artificial intelligence.
Core views
The sector has undergone a significant valuation de-rating, and market pricing has shifted from sales multiples toward profitability and free cash flow capability. J.P. Morgan believes that while artificial intelligence increases uncertainty around product substitution, competitive moats, and long-term terminal values, vendors that are truly deeply embedded in vertical workflows, control proprietary data, and are integrated into customers' core systems still have strong defensibility. At present, investors should prioritize companies with clear returns on investment, stable retention, profit expansion capability, and improving downstream demand, while avoiding names with stagnant growth, pressured channels, or deteriorating industry indicators.
Analysis framework
The report uses a combination of top-down and bottom-up approaches: first assessing U.S. economic growth and the interest-rate path, then tracking transaction activity, vacancy rates, premiums and claims, construction spending, hospital margins, capital expenditure, and life sciences R&D investment across vertical industries, and finally comparing individual companies based on business positioning, artificial intelligence capabilities, growth and profitability metrics, and EV/sales, EV/EBITDA, and EV/free cash flow valuations.
Methodology notes
Use forward EV/sales, EV/EBITDA, and EV/free cash flow to observe the sector's valuation re-rating.
Sales multiples reflect how the market prices growth, while EBITDA and free cash flow multiples place greater emphasis on earnings quality; the report notes that investor focus has clearly shifted toward profit and cash flow.
Compare the year-to-date return of the covered portfolio with SPX.
Measure sector risk appetite and valuation pressure through the performance of individual stocks and the market-cap-weighted portfolio relative to SPX.
Map downstream operating indicators to software companies' demand, sales environment, and earnings outlook.
Indicators include commercial real estate absorption and transaction volume, apartment vacancy rates, insurance premiums and claims frequency, construction spending, hospital margins, and life sciences R&D investment.
Assess competitive barriers based on industry specialization, switching costs, customer retention, pricing power, and data advantages.
Purpose-built products are harder to replace after they are deeply embedded in complex workflows, especially in less-digitized industries such as insurance, construction, and the public sector.
Assess at the same time the automation opportunities, product differentiation, and potential substitution risks brought by artificial intelligence.
Artificial intelligence can improve customer ROI and automation levels, but it may also weaken traditional software barriers, increase R&D spending, and pressure short-term margins.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- GWREInsurance core systems software, rated OW, target price $258, with 53% potential upside versus the current price listed in the report.
- Strengths
- Products are deeply embedded in the core policy, claims, and billing workflows of property and casualty insurers, with high switching costs.
- Weaknesses
- Downstream property and casualty insurance premium growth is slowing, and industry conditions are weakening at the margin.
- Comparison
- Compared with CCC, GWRE covers more core and broader insurance operating systems, and the report's rating is also more positive.
- Risks
- Slower insurance company technology budgets, cloud migration execution risk, and competitive changes triggered by artificial intelligence.
- CSGPCommercial real estate data and platform company, rated OW, target price $52, with 68% potential upside.
- Strengths
- Commercial real estate information, analytics, and online marketplaces have data and network effects; transaction volume and net absorption are improving from low levels.
- Weaknesses
- Office property vacancy rates remain high, and the commercial real estate sales environment has not fully recovered.
- Comparison
- Compared with APPF, CSGP benefits more directly from a recovery in commercial real estate transactions, marketing, and information demand.
- Risks
- Commercial real estate recovery falling short of expectations, persistently high vacancy rates, and insufficient returns on new business investment.
- APPFProperty management cloud software, rated OW, target price $260, with 29% potential upside.
- Strengths
- The AI-native platform can centralize property management processes and automate workflows, with significant long-term digitization potential.
- Weaknesses
- Higher apartment vacancy rates are unfavorable for customer operations; the medium- to long-term impact of rent growth may weaken.
- Comparison
- Compared with CSGP, APPF is more focused on residential property management operating software and is more sensitive to the multifamily residential operating environment.
- Risks
- Tighter budgets among property management customers, slowing growth, and AI investment affecting margins.
- VEEVLife sciences industry cloud platform, rated OW, target price $272, with 19% potential upside.
- Strengths
- Covers commercialization and R&D processes, has deep industry specialization, and is developing AI-native CRM and specialized agents.
- Weaknesses
- Uncertainty remains in life sciences end markets, and biotech R&D spending is relatively weak.
- Comparison
- Compared with horizontal CRM vendors, VEEV is more deeply embedded in the clinical, regulatory, and commercialization processes of pharma and biotech.
- Risks
- Volatility in pharma customer budgets, product migration execution, intensifying competition, and rising AI R&D investment.
- HQYHealth savings account and consumer benefits administration platform, rated OW, target price $123, with 18% potential upside.
- Strengths
- Has scale advantages in U.S. HSA and consumer-directed benefits administration.
- Weaknesses
- The business is affected by employment, account growth, and the interest-rate environment.
- Comparison
- Compared with healthcare services workflow software, HQY is more oriented toward account administration and benefits financial infrastructure.
- Risks
- Interest-rate changes, account growth falling short of expectations, and regulatory policy adjustments.
- GDDYSMB internet infrastructure and digital tools platform, rated OW, target price $124, with 33% potential upside.
- Strengths
- Domains, website building, payments, and AI marketing tools form a one-stop platform, with human service support also provided.
- Weaknesses
- Core customers are mostly micro businesses, making the company sensitive to SMB conditions and customer churn.
- Comparison
- Compared with WIX, GoDaddy has a broader product portfolio, and the report assigns it OW while WIX is rated UW.
- Risks
- Weaker SMB formation activity, rising customer acquisition costs, and competition from AI website-building tools.
- PEGACustomer relationship management and process automation software, rated OW, target price $54, with 66% potential upside.
- Strengths
- Valuation implies significant recovery potential, and process automation and customer engagement capabilities can benefit from enterprise AI adoption.
- Weaknesses
- The share price has fallen 45% year to date, reflecting market concerns about growth and execution.
- Comparison
- Like BRZE, it belongs to customer relationship and engagement software; PEGA has higher potential upside under the target price listed in the report.
- Risks
- Slower enterprise software spending, intensifying competition, and earnings improvement falling short of expectations.
- ALRMConnected property SaaS platform, rated UW, target price $40, with 30% potential downside versus the current price listed in the report.
- Strengths
- Security, video analytics, and energy management platforms have subscription attributes and serve customers through professional installation channels.
- Weaknesses
- Relies on partners to reach and serve end customers, with limited channel control.
- Comparison
- The report identifies it as a UW name with relatively clear downside in the covered portfolio.
- Risks
- Valuation decline, slowing channel growth, intensifying competition, and difficulty converting AI features into incremental revenue.
Key data
- SPX year-to-date performance+13%As of the 2026 year-to-date period used in the report.
- Covered portfolio year-to-date performance-10%Calculated on a market-cap-weighted basis, with only three companies outperforming SPX.
- Current EV/sales5xVertical SaaS and HealthTech covered portfolio; 10x in August 2025.
- Current EV/EBITDA14xCovered portfolio; 38x in August 2025.
- U.S. real GDP growth forecast2% in 2026, 2% in 2027Forecast by J.P. Morgan economists.
- Federal Reserve policy rate path3.75% from 2026 through the first half of 2027, 4.00% in the second half of 2027The report uses the upper bound of the range.
- Hospital operating margin8.4% in May 2026Above the approximately 7% level in 2025.
- Hospital capital expenditure budget growthExpected +2% in 2026Below the 3% growth in 2025.
- Large pharma and biotech R&D spending+11% YoY as of 2Q26Trailing twelve-month basis; biotech declined 1%, while large pharma grew 12%.
- Biotech financingAbove the 18-year median year to date in 2026Financing levels have also exceeded 2025 levels.
Impact & implications
Valuation compression has improved the medium- to long-term risk-reward for high-quality vertical software companies, but differences within the industry are significant. A recovery in financial services technology investment, improvements in commercial real estate transactions and absorption, and stable hospital profits and capital expenditure are favorable for related software demand; slowing insurance premium growth, weakening auto claims frequency, and pressure in non-residential construction are headwinds. Investors should place greater emphasis on profit delivery, free cash flow, AI commercialization, and downstream customer budgets, rather than awarding high valuations based solely on revenue growth.
Risks
- Artificial intelligence lowers the barrier to software development and intensifies concerns about terminal value and product defensibility.
- Revenue growth stagnation, while AI and product investment may continue to pressure margins.
- The interest-rate path or U.S. economic growth may deviate from expectations, affecting enterprise technology budgets and valuations.
- Commercial real estate vacancy rates may remain persistently high, and improvements in transactions and absorption may not continue.
- Property and casualty insurance premium growth and auto claims frequency may continue to weaken.
- Non-residential construction, industrial activity, or SMB conditions may deteriorate.
- Life sciences R&D budgets, financing, and IPO activity may weaken again.
- High switching costs cannot fully eliminate platform substitution, cloud migration, and execution risks.
What to watch
- Performance of the covered portfolio relative to SPX and changes in EV/sales, EV/EBITDA, and EV/free cash flow multiples.
- Software companies' revenue growth, margin expansion, and free cash flow realization.
- Actual adoption rates, pricing power, customer ROI, and incremental costs of artificial intelligence products.
- Bank technology reinvestment, capital markets activity, and M&A transaction activity.
- Commercial real estate transaction volume, net absorption, vacancy rates, and multifamily residential rent growth.
- Property and casualty direct premiums, auto claims frequency, and cost per claim.
- Non-residential construction spending, industrial production, and infrastructure investment.
- Hospital operating margins, labor costs, and capital expenditure budgets.
- Large pharma and biotech R&D spending, financing, and IPO activity.