Apollo Asset Management: The software industry has entered a "fierce technological cycle", and valuation logic is facing a historic reset.

Apollo Asset Management Co-President John Zito warned that driven by the disruptive power of artificial intelligence, the software industry is entering the early stages of an "extremely violent technological cycle." In an interview, Zito explained that as valuations undergo significant resets, the market is beginning to aggressively sift winners from losers. Zito stated that the industry remains crucial, but the investment landscape has fundamentally shifted. "In the face of everything happening now, we must remain extremely humble," he said. "We must consider very carefully whether we truly understand what the world will look like a year or two from now." While he expects an increase in software usage, the prices investors are willing to pay are being significantly recalibrated. The Apollo co-president reviewed the period from 2018 to 2022, when software accounted for 30% to 40% of the private equity market. During that era, investors assumed a customer retention rate close to 100% and virtually no disruption risk, leading to many small and medium-sized software companies being privatized based on what now seem to be questionable assumptions. The uncertainty in the current market is already reflected in the stock prices of giants like Salesforce, Inc. (CRM.US) and Workday (WDAY.US). "The market discount rates already incorporate this uncertainty," noted Zito. He pointed out that as new financing begins to consider the previously overlooked disruption risks, some stocks have plummeted significantly. Zito offered a cautionary historical comparison: he noted that even though current software revenues may look healthy, disruption often takes years to manifest in sales data. He mentioned that when the iPhone was introduced in 2007, BlackBerry Limited's sales actually peaked in 2011 - a warning that software companies today should take note of. Based on this analysis, Apollo Asset Management Co. has maintained a "reduce" position on the software industry for the past 18 months. Zito emphasized that with industries facing potential disruption from advances in artificial intelligence, current financing must take into account risk factors that were not even considered a few years ago.