AI Disruption Creates New Risks and Opportunities for Software Stocks, Impacting Investor Strategies

Imagine if your favorite pizza place suddenly had robots making pizzas faster and cheaper than humans—would people still pay the same price for a slice? That’s what’s happening with software companies as artificial intelligence (AI) moves in.

Why This Matters for Investors

Software stocks, once the stars of the stock market, are having a tough year. Big names like Intuit, ServiceNow, GoDaddy, AppLovin, and Adobe are some of the worst performers in the S&P 500 so far. Investors are worried that AI could change how these companies make money, especially with new AI tools that can do some of the same jobs as their software.

This matters because many investors count on software companies for steady, predictable profits. If AI changes the game, it could shake up portfolios and even entire sectors.

Bull Case: Reasons to Stay Positive

• AI as a Tool, Not a Threat: Some experts think AI won’t fully replace software, since it still needs to understand complex business tasks.
• Adapting Business Models: Software companies are already trying new ways to charge for their products, like mixing “pay per use” with traditional subscriptions.
• Room to Grow: Many analysts believe the recent drop in software stock prices might be overdone, and these companies could bounce back if they use AI to boost growth.
• Strong Track Record: According to Statista, global enterprise software revenue has grown every year since 2009, showing resilience even during tough times.

Bear Case: Reasons to Be Cautious

• AI Could Replace Users: Many software companies charge by the number of people using their service. If AI does the work of humans, companies might pay for fewer “seats,” cutting into revenue.
• Disruption Is Hard to Fight: History shows that new technology can quickly make old business models outdated—just like how streaming changed the music and movie industries.
• Falling Prices: With AI making it cheaper to create new software, competition could increase and prices could drop, hurting profits for big players.
• Market Jitters: When investors get nervous about big changes, they sometimes sell off stocks too quickly, which can make prices swing wildly.

What the Experts Are Saying

Some analysts, like Ben Reitzes from Melius Research, believe AI could “eat” software by making coding cheaper and easier, shrinking the need for expensive, big-name applications. Others, like Arjun Bhatia from William Blair, say the sell-off is overdone and that software companies will find ways to make money from AI.

Gil Luria from D.A. Davidson points out that software companies still have strong, recurring business models. He thinks the recent drop in stock prices could be a good chance for investors to buy in. But he warns that the market’s opinion can change quickly, and picking the right companies is more important than ever.

Some experts see opportunity in companies that help manage and connect data, like Snowflake and MongoDB, which may be less at risk from AI disruption because they focus on making data useful and secure, not just on end-user applications.

Investor Takeaway

• Don’t Panic Sell: The market sometimes overreacts to new technology. Think before making big changes to your portfolio.
• Look for Adaptable Companies: Invest in software businesses that are integrating AI or changing how they charge customers.
• Diversify: Don’t put all your money in one sector. Spread out your investments to manage risk.
• Focus on Data Connectors: Consider companies that help manage and secure data, as they may be less vulnerable to AI replacing users.
• Stay Informed: Keep up with how AI is changing the software industry, and watch for companies that are leading the way in adapting to these changes.

For the full original report, see CNBC