Summary
Software stocks fall on AI disruption fears, but selling intensity eases
Scramble to shield portfolios as AI muddies valuations, business prospects
Selloff has been overdone, analyst says
Software and service stocks shed $830 billion in market value in six trading days
(Reuters) - Investors were assessing on Wednesday whether a selloff in global software stocks this week had gone too far, as they weighed if businesses could survive an existential threat posed by artificial intelligence.
The answer: It's unclear, but AI's development will involve volatility.
After a broad selloff on Tuesday that saw the S&P 500 software and services index fall nearly 4%, the sector slipped another 0.73% on Wednesday, notching the sixth straight session of losses and wiping out about $830 billion in market value since January 28.
Software stocks have been under pressure in recent months as AI has gone from a tailwind for many of these companies to a possible disruption. The latest selloff was triggered by a new legal tool from Anthropic's Claude large language model.
The tool - a plug-in for Claude’s agent for tasks across legal, sales, marketing and data analysis - underscored the push by LLMs into the “application layer,” where these firms are increasingly muscling into lucrative enterprise businesses for revenue they need to fund massive investments. If successful, investors worry, it could wreak havoc across industries from finance to law and coding.
STRATEGY EVOKES AMAZON.COM
The LLMs strategy – and its potential to hurt established businesses – is reminiscent of how Amazon.com disrupted several industries by using its foothold in a niche online book market to build a business that now spans retail, cloud and logistics.
Some analysts said the success of these AI LLMs was, however, far from guaranteed, given that they lack the specialized data crucial to businesses in the industries. The selloff reflected a scramble to shield portfolios as the rapid advances in the technology muddy valuations and business prospects beyond the standard three-to-five-year forecasts of companies, they said.
"The selloff, which arguably started last quarter, is a manifestation of an awakening to the disruptive power of AI," said James St. Aubin, chief investment officer at Ocean Park Asset Management in Santa Monica, California.
"The seemingly wide moats of these companies feel a lot more narrow today as competition from AI-created products intensifies. Perhaps this is an overreaction, but the threat is real and valuations must account for that. My biggest fear is that this is a canary in the coal mine for the labor market."
That was on full display in recent days. Thomson Reuters, which owns the Westlaw database, fell nearly 16% on Tuesday after racking up seven straight losing sessions. It gained nearly 2% on Wednesday. MSCI lost 1.8% after losing about 7% in the prior session.
Britain's Relx finished down 1.3% after shedding 14% on Tuesday. The London Stock Exchange eased 0.1% after losing nearly 13% in the previous trading day.
The S&P 500 software and services index has fallen nearly 13% over six straight sessions and is down 26% from its October peak.
The software sector's deepening selloff on Wednesday failed to lure bargain hunters, with the dip-buying reflex that has rescued countless tech routs conspicuously absent.
The rout had broader ripple effects.
On Tuesday, a group of asset managers, including Apollo, Ares, Blackstone, Blue Owl, Carlyle and KKR, fell between 3% and 11%. This was driven by worries that "weakness in the software sector will cause credit problems" for alternative asset managers, Oppenheimer analysts wrote in a note. Shares of the asset managers recovered between 0.2% and 5% on Wednesday.
Apollo, Carlyle and Blackstone declined to comment. Blue Owl and KKR did not immediately respond to requests for comment.
Ares executive Kort Schnabel said on a conference call on Wednesday that its business development company, Ares Capital Corporation, had "a very small amount of portfolio companies that could be disrupted, and that's where we're spending a lot of our time and focus." He added the risk was not in the core enterprise software business.
The rout hit the broader market. The S&P 500 lost 0.51% while the Nasdaq Composite lost 1.51%. Several technology companies ended lower, dragged down by AI worries. Nvidia fell 3.4%, Meta Platforms shed 3.2%, Alphabet lost 2% and Oracle dropped 5.1%.
"I think there's probably more room to go in this selloff, but the broader market is beginning to top out and there's a lot more potential downside than upside," said Bill Strazzullo, chief market strategist at Bellcurve Trading in Boston.
AI IS NOT REPLACING SOFTWARE: NVIDIA
Some analysts and experts said it is too early to call an end to global software and data companies. Nvidia CEO Jensen Huang said on Tuesday that fears AI would replace software and related tools were "illogical" and "time will prove itself."
Mark Murphy, head of U.S. enterprise software research at JPMorgan, said it “feels like an illogical leap” to say a new plug-in from an LLM would “replace every layer of mission-critical enterprise software."
Software is seen as especially vulnerable to disruption as tools such as Claude increasingly automate the routine tasks that have long underpinned the industry's pricing power.
“I think the software selloff is getting overdone and the logic seems flawed," said Talley Leger, chief market strategist at The Wealth Consulting Group. "Shouldn't improving AI tools make it easier to create new and better software applications at lower prices, therefore improving software company margins?"
Comments