Wall Street’s long-running unease toward software stocks has intensified into broad capitulation. Investors rush to exit the sector amid mounting fears that AI will erode traditional business models and pricing power.
The main averages on Wall Street slumped yesterday, dragged down by AI-darlings Nvidia (NVDA) and Microsoft (MSFT), which both declined by nearly 3%. Sentiment around software stocks has recently been dour. Investors have been fretting over competition from new AI models on the sector.
Claude’s AI claws
The latest bout of anxiety was triggered after AI startup Anthropic unveiled a productivity tool for in-house legal teams. This raised concerns that generative AI could displace established legal software providers.
The news has sent shockwaves right across the professional services sphere, sending share prices tumbling. Across the pond, the likes of PayPal (PYPL), Gartner (IT), Thomson Reuters (TRI), LegalZoom (LZ) and CS Disco (LAW) have crashed between 12%-20% this week. Meanwhile, Experian (EXPN), Sage (SGE), Rightmove (RMV) and Relx (RELX) have run up steep losses led by London Stock Exchange’s (LSEG) -14% decline.
‘We call it the SaaSpocalypse, an apocalypse for software-as-a-service stocks’, said Jeffrey Favuzza, an equity trader at Jefferies.
Trading, he said, is very much ‘get me out’ style selling.
Disruption fears have been simmering for months and accelerated following Anthropic’s January release of its Claude Cowork tool.
Project Genie
Video-game stocks have also been caught in the downdraft following Alphabet’s (GOOG) rollout of Project Genie last week. This tool can generate immersive digital environments from text or image prompts. Alphabet reports earnings after the close this evening.
The S&P North American Software Index is now on a three-week losing streak. It finished January down 15%, its worst monthly performance since October 2008.
‘I ask clients where their hold-your-nose level is, and even with all the selling, I haven’t heard much conviction’, Favuzza said.
‘People are just selling everything and don’t care about price.’
Earnings season has done little to calm nerves. Only 67% of software companies in the S&P 500 have beaten revenue expectations so far, compared with 83% across the broader technology sector, according to Bloomberg data. While most software firms have exceeded profit forecasts, investors remain focused on longer-term growth risks.
Microsoft exemplified the tension. Despite solid quarterly results, its shares fell 10% last week as investors focused on slowing cloud revenue growth and heavy spending on AI. January marked the stock’s worst month in more than a decade. In addition, earnings from ServiceNow (NOW) and SAP (SAP) reinforced concerns about corporate demand.
Not all news has been negative. Palantir Technologies (PLTR) posted stronger-than-expected results and issued a bullish outlook. The company reported 70% fourth-quarter revenue growth, which you can read about here. Its shares rose nearly 7%.
More competition and pricing pressure
‘The fear with AI is more competition, more pricing pressure and weaker competitive moats’, said Thomas Shipp, head of equity research at LPL Financial. ‘That widens the range of growth outcomes and makes valuations harder to justify.’
Those concerns led Piper Sandler to downgrade several software firms this week, including Adobe (ADBE), Freshworks (FRSH) and Vertex (VRTX). The downgrade was due to risks from ‘seat compression’ and so-called ‘vibe coding’, where AI writes software code.
Some investors see opportunity in the selloff. The Sycomore Sustainable Tech fund, based in the US, has reportedly been buying Microsoft shares. They are betting the company will emerge as an AI winner. Microsoft now trades below 23 times forward earnings, which is near a three-year low.
BTIG’s Jonathan Krinsky said software stocks are ‘probably oversold enough for a bounce’ but warned that rebuilding confidence will take time. For investors, the challenge remains identifying which companies will benefit from AI and which face lasting disruption.
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