From "devouring the world" to "being devoured by AI": Market re-evaluates the software sector, selling off "premium collapse" and "old technology".

For many years, software companies have been the darlings of Wall Street investment institutions such as Goldman Sachs and Morgan Stanley. High profit margins, long-term low capital requirements, and sustained broad performance growth have led venture capitalist Marc Andreessen to declare in 2011 that "software companies are eating the world," driving the stock prices of broadly diversified software companies focusing on multiple fields towards a long-term bull market curve. High-quality fundamental software giants such as Microsoft, Google, Oracle, and Salesforce have attracted global capital in droves. Thirteen years later, artificial intelligence has sparked a similar investment frenzy in software stocks, with some Wall Street investment institutions preparing to make a significant portion of the software industry a top dish at the "AI feast." Since 2024, the global technology stock investment wave has covered both AI computing infrastructure and AI application software, providing significant momentum to the valuations of AI application companies such as Applovin, Trade Desk, Duolingo, and Palantir. Specifically, killer AI applications that cover various industries for B2B or B2C, as well as the "AI intelligent entity" that is highly likely to significantly increase human societal productivity, are likely to see explosive growth. This is why global funds have flowed massively into some core software stocks since 2024. Companies' urgent need to improve efficiency and reduce operating costs has significantly promoted the extensive application of two core categories of AI application software - generative AI applications and AI intelligent entities. In particular, AI intelligent entities represented by OpenAI Deep Research and Manus are capable of automating repetitive tasks, conducting large-scale data analysis and synthesis based on powerful AI models, providing real-time monitoring insights, and making appropriate decisions in extremely complex situations in a short period of time, thereby enhancing business efficiency. The logic for enhancing personal learning and work efficiency is similar. AI intelligent entities can also efficiently participate in all stages of large projects in various fields globally, greatly accelerating project progress. Since 2024, benefiting from the accelerated expansion of demand for artificial intelligence application software, advertising and marketing service provider Applovin focusing on "AI + digital advertising" and industry leader Palantir focusing on "AI + data analysis" have both announced incredibly strong financial performance data and future outlook. This means that not only the demand for AI computing infrastructure represented by NVIDIA AI GPUs is incredibly strong, but the demand for enterprise-level AI application software that can comprehensively improve operational efficiency is also thriving and rapidly penetrating into various industries. Meta, the parent company of Facebook and Instagram, has achieved far better-than-expected strong revenue growth under the new "AI + digital advertising" advertising engine, and Meta has raised its minimum full-year capital expenditure from $64 billion to $66 billion for 2025, with the full-year expenditure expected to be between $66 billion and $72 billion, highlighting the strong growth of its advertising business model based on "AI + digital advertising" that is sufficient to support its aggressive investment in AI infrastructure. However, not all software stocks have experienced a "super bull market trend" like major software giants such as Facebook's parent company Meta, Palantir, and Applovin in the unprecedented AI frenzy. The so-called "artificial intelligence narrative" is not a significant catalyst for positive performance and valuation for some software stocks, but rather a catalyst for a bear market for these long-popular software stocks. These software companies that have been severely hit by massive market sell-offs and suffered massive stock price declines typically have the two main tags: the collapse of software product premiums under the AI wave and "old technology" anxiety. AI is not a boon for all software stocks Salesforce Inc., Adobe Inc., and ServiceNow Inc. are among the worst-performing technology companies in the S&P 500 index this year, with a combined decline of at least 16%, evaporating about $160 billion in market value. According to EPFR statistics, investors have withdrawn funds from the software and services industry in the US stock market for two consecutive months up to June, after experiencing net outflows only once in the previous 18 months. A basket of software-as-a-service (SaaS) software companies compiled by Morgan Stanley has fallen more than 6% year-to-date, while the technology-heavy Nasdaq 100 index has risen by about 12%. The institution did not disclose the specific components of this basket, but Morgan Stanley indicated that Asana Inc., HubSpot Inc., Bill Holdings Inc., and Vertex Inc. are among the top decliners in SaaS software stocks, all falling by at least 29%. Although artificial intelligence threatens various traditional industries based on SaaS such as education, talent services, and financial management, investors see a more imminent threat from AI models to software companies that write code for digital services such as customer relationship management and backend functions. "Technological obsolescence could come sooner than expected," said Robert Ruggirello, Chief Investment Officer of Brave Eagle Wealth Management. "People are cautious for good reasons." While this anxiety puts pressure on stock prices, it does not mean that investors are completely disappointed with the long-standing bull market sector of software. After all, tech giants such as Microsoft, Oracle Corp, and Palantir Technologies Inc. that have outperformed the S&P 500 index since 2023 are all software tech giants, and they are among the major contributors to the significant gains and top performers in the S&P 500 index this year. What sets apart these software companies with soaring stock prices from underperformers like Salesforce and Adobe is the market's belief that they can "take the initiative in AI strategy" rather than stubbornly "defend their existing positions" like Salesforce and Adobe and not pivot to AI at the core of their business growth - after all, tech giants are investing hundreds of billions of dollars to develop new AI-based software product lines and build or expand AI computing infrastructure on a large scale. With investments in artificial intelligence boosting targeted advertising and user engagement, Meta Platforms Inc., the parent company of Facebook, is experiencing faster revenue growth. Palantir's "AI + data analysis" software products are expected to drive a significant 45% increase in sales this year. Network security companies such as CrowdStrike Holdings Inc. are also emerging as strong performers, as investors bet on the irreplaceability of AI in these cybersecurity products and the significant upgrades expected in cybersecurity systems under the influence of AI. Software companies facing a "life-or-death decision" under the collapse of premiums and "old technology" anxiety However, for many ordinary software companies, the threat is too real: artificial intelligence could disrupt their value propositions in the business sector - providing premium digital tools to enhance productivity to customers. If cost-sensitive clients such as banks or retailers can obtain nearly the same software services based on AI models from leaders in AI applications such as OpenAI or Anthropic and xAI at a lower price, the entire business plan could be destroyed. Investors still cannot determine whether artificial intelligence can replace work management software dominated by companies like Asana, but a slowdown in customer acquisitions in the first quarter is enough to raise alarms and drive stock prices lower. HubSpot may also be able to adapt to artificial intelligence, but investors are concerned that its CRM customer management tools may face more intense competition pressure related to AI. Monday.com is in a similar situation. The company's centralized workflow software is not at risk of being "completely outdated," but investors worry that the company's management may stick to old strategies and are concerned that AI application software or AI intelligent entities could weaken its performance growth. Disappointing revenue guidance on August 11 was enough to trigger a massive sell-off, with the stock price plummeting by 30% that day. Underperformers in the software industry in 2025 "Any company that insists on old technology will either suffer fundamental damage or have to transform into the field of AI applications, and unless this transformation is successful, you will see massive selling pressure on the stock price," said Mark Bronzo, Chief Investment Strategist at Rye Consulting Group. Currently, investors are not broadly investing in almost all software companies as they did in 2024, but are selling stocks of software companies that lack convincing AI strategies or clear defense measures against this significant technological advancement. "Perhaps in 2023 or 2024, people will consider buying high-quality software companies like Salesforce when their historical valuations become cheaper," Bronzo said. "Now, we may not see this mindset." This market damage is not limited to US software companies. European software companies with the largest market capitalization such as SAP SE, Sage Group Plc, and Dassault Systmes SE also saw significant declines after Monday.com issued a warning. With ChatGPT, a creation of OpenAI, reaching approximately 700 million weekly active users, Ruggirello likens software companies to "an energy company waking up to find themselves competing with a 'company equivalent to Exxon Mobil'." This concern is reflected in the valuation anxiety in the software sector. Due to rapid expected revenue growth and the favored subscription model (bringing predictable income flow), the valuation of this sector has been significantly higher than the overall US market - the S&P 500 index. However, a basket of software stocks compiled by Morgan Stanley has dropped to a mere 23x forward P/E ratio this month - only half of the average valuation level of the past decade and the lowest value recorded by Bloomberg since 2014. The Nasdaq 100 index currently has a slightly lower forward P/E ratio of about 27x based on future earnings. Strategists from UBS suggest that the sharp decline in some corners of the software sector may present significant investment opportunities. Earlier this month, they advised investors to focus on internet and software companies that are lagging in stock price performance in this AI frenzy. "Although revenue growth related to AI has not yet matched the industry's aggressive investment, the substantial improvement in AI monetization trends and the adoption and penetration of AI are encouraging," wrote the team of strategists led by Ulrike Hoffmann-Burchardi, the Chief Investment Officer for the Americas and Global Equities at UBS, in a research report. However, the overall caution of global investors towards software stocks cannot be ignored at present. In the twenty years leading up to the market peak in 2021, no industry in the S&P 500 index experienced as large an increase in weight like software and services - from less than 6% to nearly 14.5% (even after reclassifying stocks like Google, Facebook, Amazon, etc. to other sectors in 2018). However, the group's weight in the market-capitalization-weighted S&P 500 index is now about 12%, surpassed by semiconductor giants who have benefited from the surge in demand for AI computing hardware (led by semiconductor giants such as NVIDIA, Broadcom, and TSMC). It is worth noting that if it weren't for the significant outperformance of Microsoft, Oracle, and Palantir against the S&P 500 index, the weight of the software group would likely be much lower. "The market views risk as significantly increasing, and we won't have clarity in the short term," Ruggirello from Brave Eagle said. "Currently, what we can be sure of is that a few software companies like Meta and Microsoft continue to win and are constantly winning major AI battles - but not all software companies are like this."