Wall Street’s Worsening Sentiment on Software Stocks
(Bloomberg) — Wall Street has long been wary of software stocks, but recent sentiment has shifted from bearish to grim, with traders aggressively selling off shares across the sector amid rising concerns about the potential impact of artificial intelligence.
The ‘SaaSpocalypse’
Jeffrey Favuzza from Jefferies described the current situation as the “SaaSpocalypse,” indicating a catastrophic phase for software-as-a-service stocks. He noted that trading activity has become characterized by a “get me out” mentality.
Impact of AI Developments
The anxiety escalated on Tuesday when AI startup Anthropic launched a productivity tool for corporate lawyers, resulting in a sharp drop in shares of legal software and publishing companies. The London Stock Exchange Group’s stock plummeted 13%, while Thomson Reuters Corp. experienced a 16% decline. Other firms like CS Disco Inc. and Legalzoom.com also faced significant losses, with drops of 12% and 20% respectively.
Escalating Concerns
Fears regarding vulnerabilities in the software industry have been mounting for several months, particularly following Anthropic’s January release of the Claude Cowork tool. Recently, video game stocks also suffered when Alphabet Inc. began its Project Genie rollout, signaling an extensive three-week slump in the S&P North American software index, culminating in a 15% decline for January—the steepest drop since October 2008.
Investor Uncertainty
Despite some clients holding stock, Favuzza observed a lack of confidence in setting a “hold-your-nose level” for investments, with many investors simply offloading shares without regard for prices. This unease has also reached private equity, where firms like Arcmont Asset Management are reassessing portfolios for vulnerable businesses.
Mixed Earnings Performance
So far in the current earnings season, only 67% of software companies in the S&P 500 have surpassed revenue expectations, lagging behind the tech sector’s 83%. While most software firms have met earnings targets, long-term growth concerns overshadow any short-term successes. For example, Microsoft Corp. provided solid earnings, yet investors focused on declining cloud sales, leading to a 10% stock drop following the announcement.
Future Outlook
Some investment professionals view the decline in software stocks as a buying opportunity. The Sycomore Sustainable Tech fund recently acquired Microsoft shares, betting on its potential to succeed in the AI landscape. However, distinguishing which companies will thrive amid fears of AI-induced competition remains a critical challenge for investors.
