Software companies, once Wall Street darlings, are now under pressure as artificial intelligence gains prominence. This shift has investors concerned that AI could significantly disrupt the software industry, impacting firms that provide digital services such as customer-relationship management and back-office functions. The rise of AI is drawing comparisons to Marc Andreessen’s 2011 prediction that ‘software is eating the world’, but with a twist: AI may now consume a portion of the software sector itself.
Several major software companies have seen significant declines in market value. Salesforce, Adobe and ServiceNow are among the worst performers in the S&P 500 this year, with market values down at least 17 per cent, representing a combined loss of approximately $US246 billion ($379 billion). According to data from EPFR, investors withdrew funds from the software and services sector for two consecutive months through June, a notable shift after only one monthly drawdown in the previous 18 months.
A Morgan Stanley basket of software-as-a-service stocks has decreased by more than 6 per cent this year, while the tech-heavy Nasdaq 100 has advanced 11 per cent. Individual software companies like Asana, Hubspot, Bill Holdings and Vertex have also underperformed, with declines of at least 29 per cent. Robert Ruggirello, chief investment officer at Brave Eagle Wealth Management, notes that ‘tech obsolescence can come out of nowhere’, contributing to increased investor caution.
While AI’s potential disruption spans various sectors, the immediate concern is its impact on software firms. Investors are wary of the rapid pace of technological change and the potential for AI to render existing software solutions obsolete, leading to a cautious approach towards the software industry.
