Software stocks, recently battered by investor anxieties surrounding artificial intelligence, are presenting a potential buying opportunity, according to several analysts. While fears of AI disrupting the industry have led to a significant sell-off, a growing consensus suggests that AI is more likely to augment existing software workflows than outright replace them, at least in the near term.
The recent turbulence stems from concerns that new AI models and tools could diminish the need for traditional software services. This apprehension peaked last week with the release of AI-powered legal tools by Anthropic, triggering a market reaction dubbed “SaaSpocalypse” by some observers. However, experts at JPMorgan Chase argue that these fears are largely overblown. In a note released last week, they stated that enterprise software is deeply ingrained in corporate operations and that AI is currently positioned to support, rather than supplant, existing systems.
This perspective is supported by the fact that most software companies have already begun integrating AI features into their products and are actively planning further expansion in this area. Despite the negative investor sentiment, Wall Street forecasts for the software sector remain robust, projecting revenue growth exceeding 16% this year alongside improving profit margins. The majority of software companies that have reported fourth-quarter results have exceeded expectations.
The current market conditions have created a situation where some software stocks are trading at substantial discounts. According to Morgan Stanley analysts, several stocks are now available at more than a 50% discount to their fair value. They highlight that the indiscriminate nature of the recent sell-off – impacting companies regardless of their business models or underlying fundamentals – has created a unique opportunity for investors.
However, Morgan Stanley cautions that uncertainty surrounding AI’s development and deployment will likely continue to pose a headwind for stocks lacking demonstrable AI-driven productivity gains or revenue growth. The firm identifies five software stocks that could potentially double in value over the next 12 months if AI-related fears subside and share prices rebound to what they consider fair value. These include Intuit (INTU), ServiceNow (NOW), and Salesforce (CRM), all of which have experienced significant declines in value since the start of the year. The iShares Expanded Tech-Software Sector ETF (IGV) has shed over a fifth of its value year-to-date.
The situation echoes patterns observed in previous periods of technological disruption. Uncertainty surrounding AI’s impact has repeatedly shaken the stock market, only to be followed by a recovery as investors regain confidence. The key, according to analysts, lies in demonstrating tangible benefits from AI integration – whether through increased productivity, new revenue streams, or improved efficiency.
Goldman Sachs, while signaling a “grim shift” in the overall market, acknowledges the potential for recovery in select software names. The firm’s assessment suggests a broader market recalibration, with investors shifting away from growth-oriented technology stocks and towards value-oriented sectors like industrials and energy. This shift doesn’t necessarily preclude opportunities in oversold software companies, but it underscores the need for careful evaluation and a focus on companies with strong fundamentals.
Investing.com highlights that a number of software stocks with a market capitalization exceeding $1 billion have experienced declines of more than 25% in the past month, presenting potential upside of 90% or more. The firm’s InvestingPro AI-selected stock winners are designed to help investors identify these opportunities, currently offered with a 55% discount during a limited-time flash sale.
The current market environment demands a nuanced approach. While the threat of AI disruption is real, the narrative of complete displacement appears increasingly unlikely. The most successful software companies will likely be those that effectively leverage AI to enhance their existing offerings, rather than viewing it as an existential threat. The recent market correction may, represent a strategic entry point for investors willing to bet on the adaptability and resilience of the software industry.
The debate over AI’s impact on software isn’t simply about technological feasibility; it’s also about pricing models. As , Forbes reported that AI is forcing software-as-a-service (SaaS) companies to rethink their traditional per-seat licensing models, as AI tools potentially reduce the number of licenses required per user. This shift in pricing dynamics adds another layer of complexity to the investment landscape.
the future of software in the age of AI hinges on the ability of companies to demonstrate value and adapt to evolving market demands. The current downturn, while painful for some, may ultimately serve as a catalyst for innovation and a more sustainable growth trajectory for the industry.
