Citigroup: The software sector in North America is growing steadily, and the next round of frontrunners is emerging, driven by AI

The Zhitong Finance App learned that Citibank believes that the newly announced “report card” for the third quarter of 2025 for the North American software sector has given the market a reassurance pill: from a revenue perspective, the median CAGR (CAGR) of the more than 20 SaaS (Software as a Service) and infrastructure software companies covered by Citigroup has stabilized at 15%, the same as before; the average value has risen slightly from 15% to 16%, and there has been no large-scale reduction in revenue expectations for two consecutive quarters.

More importantly, the net revenue retention rate (NRR), which intuitively reflects the willingness of old customers to buy more, has also generally remained stable. Among the companies providing updated quarterly data, Cloudflare (NET.US) performed well, and its net revenue retention rate jumped 5 percentage points in a single quarter, the biggest month-on-month increase among the sample companies; Rubrik (RBRK.US) successfully maintained this excellent level of net revenue during the quarter even though it already had a high net revenue retention rate of over 120%.

According to Citi Analysis, when “growth no longer fluctuates” becomes the mainstream trend in the industry, and when generative AI and intelligent agents (Agentic AI) are upgraded from simple “conceptual hype” to the “strategic needs” of enterprises, the entire software industry will have a credible foundation to achieve a second acceleration of development.

Performance at the profit level continues to maintain a steady and restrained trend. In the 2024-2026 period, the operating margin (OPM) expansion showed only a moderate upward trend, with a slight increase of 1.0 percentage points to 1.2 percentage points, while the average rose from 2.3 percentage points to 2.6 percentage points. In the selected sample pool (cohort), more than half of the companies showed no change in operating margins from month to month.

According to Citigroup analysis, after experiencing what can be called a “drastic” cost reduction action from 2022 to 2023, most corporate management is already resistant to further cost cuts. They prefer to reinvest the efficiency dividends brought by artificial intelligence (AI) into sales and R&D so as to gain a place in market competition in 2026, that is, to obtain a “table position”.

One data supports this view well: the median sales efficiency in 2025 (measured by dividing new revenue by lagging sales expenses) was 0.43, which is almost no different from the 0.44 forecast three months ago; although the average rose from 0.51 to 0.54, this increase was mainly due to some companies raising their revenue guidelines rather than further reducing expenses.

Simply put, the industry is currently pursuing growth in a “decent” manner, abandoning the old expansive development path of “sacrificing profits in exchange for market share” in the past.

Individual stock analysis

In terms of individual stock performance, Rubrik, DigitalOcean (DOCN.US), and Fastly (FSLY.US), which has just recovered from a trough, are still at the forefront of the industry.

Rubrik showed strong growth momentum during the quarter, raising the 2024-2026 compound annual growth rate (CAGR) by 2 percentage points to 34%, and continues to hold the top position in the industry. At the same time, the expansion of its operating profit margin also increased by about 2 percentage points, and the free cash flow rate (FCFM) guideline increased by 3 percentage points, and the performance of various indicators was outstanding.

DigitalOcean, on the other hand, “excels” in terms of sales efficiency. In 2025, its sales efficiency index increased sharply by 0.23 and jumped to 1.95; by 2026, the indicator further increased by 0.38 to 2.37. Both of these increases were the biggest among the companies covered by Citi. Furthermore, the company also brought forward the 18-20% growth target originally set for 2027 by a full year.

Fastly's “Strikes Back” performance was the most remarkable. In the first full quarter since the CEO and CFO took office, the company showed a strong recovery trend. The revenue growth rate guide was raised by about 3 percentage points, which in turn led to a three-year revenue CAGR increase of more than 2 percentage points, and the net revenue retention rate (NRR) also rebounded by about 2 percentage points to 106%. At the same time, operating margin expansion increased by more than 2 percentage points, free cash flow increased by more than 3 percentage points, and sales efficiency increased by 0.09 in 2025, ranking in the top three in terms of improvement in various indicators.

In stark contrast, Varonis (VRNS.US) and Rapid7 (RPD.US) are the only two companies whose growth expectations have been lowered this time.

Varonis' 2024-2026 compound annual revenue growth rate (CAGR) was cut by about 2 percentage points to 14% due to poor renewal of local deployment subscriptions and delays in federal projects. Furthermore, the company also announced that it will stop the self-hosted version of the service in December 2026. This move further strengthened the market's conservative expectations for its short-term development. In addition, Varonis' sales efficiency also declined in 2025, with a month-on-month decline of 0.02 to 0.03.

Rapid7 also faced special challenges at the execution level, and its quarterly revenue rarely fell short of expectations, which forced the company to slightly lower its growth guidelines.

Judging from the performance that “exceeded expectations”, the industry as a whole showed a positive trend. The average revenue of the industry exceeded expectations, rebounding to 2.3% from 1.6% in the previous quarter; the margin of profit exceeding expectations increased from 2.3 percentage points to 2.8 percentage points. Both indicators are slightly higher than the average for the past two years.

Specifically, in terms of individual stocks, Check Point (CHKP.US) performed particularly well, with bills exceeding expectations by 11%, setting a record for the fastest year-on-year growth rate since 2012. Fastly also performed well, with revenue exceeding expectations by 4.8% and operating margin exceeding expectations by 6.6 percentage points, far ahead of its average performance in the past two years. Although Rubrik's revenue exceeded expectations by only 2.2%, its operating margin exceeded expectations by 17 percentage points, topping the list among the sample companies, and the company also ushered in its first profitable quarter.

Summarize

Based on a combination of factors, Citi maintains its preference for “large-scale, stable growth, and high efficiency” platforms: Datadog, CrowdStrike, and Zscaler continue to hold the “first tier of growth”; Atlassian has performed extremely well in terms of operational efficiency despite its slightly slow growth rate; Rubrik and Cloudflare have received additional “extra points” from Citi with their outstanding execution capabilities and advantages in line with current market trends.

The deep message implied by this research report is very clear — in the upcoming 2026, the competitive landscape in the AI field will undergo a major shift. It will no longer be the previous model of “running fast and gradually exploring”, but will evolve into a “platform-led, all-inclusive” pattern. Only companies that hold the three key “trump cards” of customer resources, technical reserves, and sufficient cash flow are qualified to take the initiative and take an advantageous position in the next round of generative artificial intelligence (GenAI) and intelligent agents (Agentic AI) budget allocation war.

For investors, instead of betting their capital on “reversal potential stocks” where the story sounds tempting but the fundamentals are erratic, it is better to focus on “leaders” in the industry that have successfully stabilized their growth trend and can only take advantage of the AI crisis.