Software shares are in the doldrums. Blame AI
By John Towfighi, CNN
(CNN) — Tech companies are giving the world artificial intelligence — but ironically, the tech sector itself is among those now feeling the most pain from AI.
The rise of AI tools that can write and develop code is clouding the outlook for the software industry, investors say, sending shares in those companies into a slump.
Software as a service, or “SaaS,” is a bread-and-butter business model that is now at risk of disruption because of AI, investors say, a microcosm of how AI could upend the way many businesses operate.
Shares in software giant Salesforce (CRM) are down 26% this year, making it the second-worst performing stock in the Dow.
In comparison, the benchmark S&P 500 is up 10% this year, while the tech-heavy Nasdaq Composite is up 11%.
“Software valuations remain under pressure from the ‘death of software due to AI’ narrative, which likely drives continued volatility in the short term,” Matthew Hedberg, a software research analyst at RBC Capital Markets, said in an August 12 note.
Hard times for software companies
The market is reckoning with a paradigm shift in software and tech, according to Ted Mortonson, a technology strategist at Baird.
Software businesses that have been darlings of tech in past years are at risk of falling out of fashion with investors while AI models continue to develop and get better at writing code.
The traditional SaaS business model includes renting software to customers. But the rise of “agentic AI,” or an AI tool that can operate without supervision, is opening the door for companies to cut back on that rental model, Mortonson said.
Agentic models can write and develop code, encapsulated by the term “vibe coding.” If that can help companies develop their own software, it could threaten established software firms’ seat count or number of subscriptions.
“The volatility on this technology pivot to agentic is nothing I have seen in my career, and it’s happening so quickly,” Mortonson said. “Your seat count is under pressure, which is the kiss of death for SaaS.”
Companies might have anticipated this shift — but likely didn’t see it happening so fast, analysts say.
“Software right now is under massive pressure because AI is eating their lunch,” Dan Ives, global head of technology research at Wedbush Securities, said. “Adobe and Salesforce, among others, miscalculated how quick the AI revolution was going to eat into their market share.”
Salesforce did not respond to a request for comment. Adobe and Atlassian declined to comment.
Is AI eating software?
Marc Andreessen, the venture capitalist and technology investor, famously wrote in 2011 that “software is eating the world.”
Jensen Huang, chief executive at Nvidia, said in 2017 that “software is eating the world, but AI is eating software.”
Ben Reitzes, head of tech research at investment firm Melius Research, said in a note that he thinks Huang’s view is proving true.
“The world is coming around to the reality of the theme that ‘AI is eating software,’” Reitzes said.
“AI is making it clear that almost anyone from an able-bodied startup, to a big cloud (like Google) can create an application so great — that it can compete quickly and potently (like the cloud competed quickly with Dell),” he said in an August 10 note.
One of AI’s biggest cheerleaders, OpenAI CEO Sam Altman, earlier this month posted on social media: “entering the fast fashion era of SaaS very soon.”
Microsoft CEO Satya Nadella said on his company’s earnings call in July that a shift is taking place: “AI is driving a fundamental change in the biz apps market as customers shift from legacy systems to agentic business applications.”
“AI, in many respects, has disrupted this traditional software subscriber-based model,” said Angelo Zino, a tech analyst at CFRA Research.
However, Zino said it’s less certain whether AI is going to replace software.
“There’s definitely concerns out there,” Zino said. “The best way to put it is that the jury is still out in many respects.”
There are some doubts on the value of AI and whether it will provide a meaningful shift away from legacy companies like Adobe that have built long-time subscriber bases.
“There’s a threat to the model, but there are also still opportunities for these companies to prosper and adapt in this changing environment,” Zino said. Salesforce, for example, has its own AI agent tool called “agentforce.”
In a slump
Wall Street is uncertain whether AI will truly be able to replace SaaS. But shares in software companies have slid this year as investors have tried to mitigate losses in their portfolios.
“For now, they’re missing the train,” Ives said. “I believe software is going to rebound, and they’ll find their way out of this to monetize and participate in the AI party.”
Brent Thill, an equity analyst at Jefferies, said in a note that he thinks software AI fears are overblown.
“AI is a transformational wave, not a destructive hurricane for software,” he said.
Thill, who said he recently met with partners at Salesforce, said they are seeing some headwinds due to AI but believes they will ultimately rebound.
“Partners agreed that fears are overblown on AI replacing software, with many highlighting the shortcomings of vibe coding,” he said.
AI’s impact on the market can shift rapidly, Ross Mayfield, an investment strategist at Baird, said. It was just seven months ago when Chinese upstart DeepSeek caused a reckoning in Silicon Valley. But it did not last.
“The macro can change, the AI picture can change,” Mayfield said. “There’s a lot that can move quickly.”
“If you think you know what the AI landscape is going to look like 12 months from now, there’s a lot of assumptions that should probably be challenged because of how quickly this is moving,” Mayfield said.
The-CNN-Wire
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