AI Disruption Sparks Investor Scrutiny of Software Companies' Stocks

Investors are scrutinizing software companies' stocks as fears of AI disruption loom. The Morgan Stanley software-as-service stock basket has fallen 6% this year, compared to the Nasdaq 100's 11% gain. Stocks like Salesforce, Adobe, and ServiceNow have lost at least 17% of their market value. The disparity is due to the perception that some software companies are playing defense against AI, while others like Microsoft, Oracle, and Palantir are investing in AI and seeing success.

Investors are closely scrutinizing the stocks of software companies as fears of artificial intelligence (AI) disruption loom large. The Morgan Stanley software-as-service stock basket has fallen 6% this year, compared to the Nasdaq 100's 11% gain. Companies such as Salesforce, Adobe, and ServiceNow have lost at least 17% of their market value. The disparity is attributed to the perception that some software companies are playing defense against AI, while others like Microsoft, Oracle, and Palantir are investing in AI and seeing success.

The concern is that AI could disrupt industries as diverse as education and staffing services, posing a significant threat to software firms that provide digital services like customer-relationship management and back-office functions. For instance, Salesforce and Adobe have been among the worst performers in the S&P 500 this year, down at least 17% or roughly $160 billion in combined market value [1].

Investors have pulled money from the software and services sector for two consecutive months through June, according to data from EPFR. A Morgan Stanley basket of software-as-service stocks has fallen more than 6% this year, compared to an 11% advance for the tech-heavy Nasdaq 100. Companies like Asana, HubSpot, Bill Holdings, and Vertex have been among the biggest laggards, all down at least 29% [1].

However, not all software companies are suffering. Microsoft, Oracle, and Palantir are among the year's best performers in the S&P 500. These companies are perceived to be playing offense with AI, investing tens of billions in developing products and adding capacity for AI computing. For example, Meta Platforms is seeing accelerating revenue expansion as its AI investments improve ad targeting and engagement. Palantir’s AI products are expected to help fuel sales growth of 45% this year [1].

The fear of AI disruption is not limited to U.S. companies. SAP SE, Europe's biggest company by market value, dropped along with smaller peers like Sage Group Plc and Dassault Systemes SE following Monday.com's warning. OpenAI’s ChatGPT, with roughly 700 million weekly users, has sparked fears similar to those faced by energy companies waking up to a competitor the size of Exxon [1].

The sector's valuations, which have been well above the broader market due to rapid sales growth and subscription models, have also taken a hit. The Morgan Stanley software basket hit 23 times projected earnings this month, half the average of the past decade and the lowest in Bloomberg data going back to 2014. The Nasdaq 100 trades just under 27 times forecast earnings [1].

Despite the current uncertainty, some analysts see opportunities in the sector. UBS strategists recommend looking at internet and software firms that have lagged behind in the AI craze. While AI revenue growth has yet to match the industry's aggressive spending, rising monetization and AI adoption trends have been encouraging [1].

In conclusion, the software sector is facing significant challenges due to AI disruption. While some companies are thriving by embracing AI, others are struggling to adapt. Investors are cautious and are closely monitoring the sector's performance. The future of software companies will depend on their ability to navigate the AI revolution and maintain their competitive edge.

References:
[1] https://finance.yahoo.com/news/ai-disruption-fear-sparks-investor-103000758.html
[2] https://www.ainvest.com/news/workday-faces-uncertainty-morgan-stanley-analyst-warns-growth-concerns-ai-disruption-risks-2508/
[3] https://www.investing.com/analysis/servicenow-translates-ai-hype-into-tangible-revenue-and-durable-growth-200665759