There is no letup in the software rout.
The question is whether we’ve crossed some kind of rubicon where we are pricing in mass disruption due to AI.
The flashpoint seemed to be the release of Claude Plugins but it’s been a long time coming. The simple thesis is that AI makes it much easier to create software, therefore existing software is easier to replicate, perhaps vastly easier.
My guess is that hyperscalers will deploy the fruits of their massive AI investments into crushing many of these verticals. Because Microsoft already has the institutional acceptance, it could easily roll our products, similar to how it largely displaced Zoom via Teams.
The speed at the selloff in software speaks to the sudden shift in sentiment. Applovin has been in the crosshairs but reported strong earnings today. Despite that APP stock is down 18.3% today.
The thing is, even if Microsoft is the disruptor, it’s also being punished. Shares are down 27% from the November high, including 1% today.
The proxy for software is the IGV ETF, which is down almost 3% today.
This is simple a re-rating of the value of software moats. It has the valuations of software companies being repriced to 20x from +30x previously.
The question people are asking right now is: What’s the proper multiple in an AI world? Do you price them as slow growers? Or as industries in decline? If it’s the latter than you could make the case for 10x valuations and that is what has investors running for the exits.
The thing is, some of the software companies will continue to grow revenues and sales at a rapid clip. They’ve proven to be valuable to business and there is no rush to switch. For now though, they’re all being tossed out.
Another factor that’s hurting tech stocks is volatility in general. I think the flashpoint for this was Microsoft falling 12% in a single day following earnings. If a company that big can fall that hard, it creates a sense that no one is safe.
And today we saw another example with shares of Cisco down 11%. The company reported stronger numbers but its guidance was only in-line and the market has hammered the stock.
This article was written by Adam Button at investinglive.com.
