Morningstar market strategist Lochlan Halloway suggests that the recent downturn in software stocks reflects an overreaction to artificial intelligence disruption risks. Halloway notes that concerns about a potential “SaaSpocalypse” have been growing, driven by the possibility that AI’s consumption-based economics could diminish software’s high gross margins. Additionally, AI agents could challenge seat-based pricing models and lower switching costs as platforms compete in sectors like legal and finance.
Despite these concerns, Halloway believes that software companies with proprietary data, complex workflows, and strong network effects are well-positioned to withstand AI disruption. He specifically identifies ASX-listed Xero and WiseTech as oversold opportunities. Xero provides cloud-based accounting software for small businesses. WiseTech Global delivers software solutions for the logistics industry.
Halloway points out that Xero’s established two-sided network with accountants in Australia and New Zealand offers a strong competitive advantage. He also notes that WiseTech’s CargoWise platform boasts a 99 per cent annual retention rate due to high switching costs. According to Morningstar’s analysis, both stocks are currently trading at their most significant discounts to fair value in years.
Recent trading activity reflects the broader market concerns. On Friday, shares in WiseTech Global declined by 12.7 per cent, bringing their total losses since the start of the year to 39 per cent. Xero’s shares also experienced a decrease, falling by 4.7 per cent during the same trading session.
