Legal Software Stocks Plunge as Anthropic Releases New AI Tool

Software stocks declined sharply as fears of AI-driven disruption intensified, with the iShares Expanded Tech-Software Sector ETF dropping about 5% in morning trading. The sell-off pushed the fund into bear market territory, with a 21% decline from its recent high. The pressure on the sector was fueled by the release of Anthropic's new AI model, Claude Opus 4.5, which raised concerns about the future of traditional software business models.

C3.ai shares surged nearly 11% in premarket trading after reports suggested the company was in talks to merge with Automation Anywhere. The potential deal could see Automation Anywhere acquire C3.ai and go public as part of the transaction. Despite the rise in share price, C3.ai has struggled with declining revenue and financial losses, causing its market cap to shrink significantly over the past year.

However, C3.ai's recent performance does not signal a long-term turnaround. The company reported a staggering GAAP net loss of over $380 million on a trailing twelve-month basis. Despite industry-wide push for profitability, C3.ai's losses have widened. The potential merger could face integration risks and shareholder dilution, raising questions about its long-term viability.

Why Did Software Stocks Decline?

Investors are concerned that AI tools like Anthropic's new model could displace traditional software solutions, leading to reduced demand for enterprise software licenses. Anthropic's release of Claude Opus 4.5 highlighted the company's progress in AI capabilities, particularly in coding and enterprise tasks. This advancement has increased fears that traditional software companies may struggle to compete with AI-native startups.

The selloff was amplified by weak earnings from major players like ServiceNow and SAP, both of which reported underwhelming results. ServiceNow shares plunged more than 11% despite forecasting revenue above Wall Street estimates, while SAP shares dropped over 16%.

How Did the Market React?

The market's reaction to C3.ai's potential merger was mixed. While shares jumped nearly 11% in premarket trading, analysts warned that the deal could be more of a bailout than a breakthrough. The valuation gap between Automation Anywhere and C3.ai poses significant risks for current shareholders. Automation Anywhere was last valued at $6.8 billion, while C3.ai's market cap has dropped to $1.8 billion.

Despite the rise in C3.ai's share price, the broader software sector continued to struggle. The iShares Expanded Tech-Software Sector ETF dropped 5%, and the S&P 500 Software and Services Index fell 8.7% to hit a nine-month low. The decline was driven by concerns over AI's potential to permanently shrink revenue for traditional software companies.

What Are Analysts Watching Next?

Analysts are closely monitoring how traditional software companies adapt to the AI-driven market. Many companies are investing heavily in AI tools to remain competitive, but adoption has been slow. Microsoft reported slower cloud computing growth and issued softer-than-expected guidance, causing its shares to slide 12.1%.

Analysts also noted that the integration of C3.ai's AI capabilities with Automation Anywhere's legacy systems could be complex and risky. C3.ai's core strategy focuses on modernizing enterprise architecture, while Automation Anywhere specializes in robotic process automation. Combining these two approaches could create integration challenges.

Investors are keeping a close eye on the broader implications of AI on the software industry. While AI has the potential to disrupt traditional business models, it also presents opportunities for companies that can effectively integrate AI into their offerings. The success of C3.ai and other software companies will depend on their ability to adapt to the changing landscape according to industry analysis.

The software sector faces a challenging road ahead. With AI rapidly evolving, companies must find ways to innovate and remain competitive. The potential for AI to reshape the industry means that companies must be agile and forward-thinking to avoid being left behind as market observers note.