In 2011, Marc Andreesen wrote a famous opinion piece titled, "Software is Eating the World". This piece has proved to be remarkably prescient in a number of ways. One piece of evidence is the performance of software as a service stock which have been among the biggest winners of this bull market.

One of the biggest companies in the sector is (CRM  ). Salesforce's breakthrough product was its customer relationship management service. This product quickly became a necessity for corporations and resulted in greater sales and efficiencies. In effect through its software, Salesforce was able to improve the performance and reduce the headcount of companies' customer service departments.

Its remarkable success is evident in its long-term chart below which shows that the company's stock has gained nearly 3,500% since its debut in 2004.

Commensurate with the gains in its stock and its dominance in a major industry, the company's track of revenue growth is impressive. In 2004, it had $176 million in annual revenue and in 2019, it had $13.2 billion on a 12-month trailing basis.

Industry Characteristics

Economic and market conditions have been particularly ripe for software as a service stocks over the last decade. Software companies tend to have high margins as costs are minimal once product development is complete especially compared to other industries. Further, these type of enterprise-scale software that could effectively take over core functions are relatively new and continue to experience rapid-growth rates as they currently are being adopted.

This combination of growth and margins is very attractive to investors, as it creates the possibility of massive profits in the future if growth rates and margins are maintained. During periods of excess bullish sentiment in markets, stocks with these characteristics can often have the largest gains.

Another factor contributing to these stocks' attractiveness is the decreased number of growth opportunities available to public market investors especially in a low interest rate environment. The low interest rate environment reflects low growth. In this situation, companies are able to borrow money for cheap but unwilling to increase hiring or production, because they don't anticipate increased demand. Facing these conditions over the last decade, companies aggressively invested in upgrading their IT systems.

Recent Underperformance

These stocks have consistently outperformed over the duration of this bull market. Over previous periods, when the market dipped or traded flat in 2011-2012 or 2015-2016, stocks in this group continued to trend higher. And when the broader indices finally did bottom, they were among the first stocks to make new highs.

This situation can be seen with the two charts, showing those time periods, below:

Therefore, it's currently worth noting that the stock has failed to move higher on the upside and looks to be in a distribution pattern with lower highs and lower lows. This comes about as the S&P 500 (SPY) flirts with its all-time high. One reason for the weakness has been companies losing pricing power as competitiveness increases.

Going forward, this divergence should be watched. If Salesforce and other stocks in this sector continue to underperform, it could be an indication that growth investors have soured on the sector.