AI Disruption Sparks Global Software Stocks Selloff as Private Equity Faces $440B Reckoning

Skillsoft Lenders Tap Counsel Again as Software Distress Worsens

Some lenders to Skillsoft Corp. re-engaged law firm Gibson Dunn & Crutcher for legal advice as its loans fall deeper into distress, according to people familiar with the matter. The cloud-based learning company has struggled to break out of an earnings rut as artificial intelligence reshapes the software industry, said the people, who asked not to be identified discussing a private matter. Gibson Dunn previously represented lenders during Skillsoft's Chapter 11 bankruptcy in 2020. The company is now seeking a strategic review of an underperforming asset to shore up its balance sheet, the people said. Messages left with Skillsoft and Gibson were not returned. Skillsoft's debt has tumbled since December, when it disclosed plans to sell Global Knowledge, an instructor-led training unit that it acquired by goingBloomberg Terminal public through a blank-check company shortly after exiting court protection in 2020. Global Knowledge has been a drag on the overall business, recording an 18% year-over-year decline in revenue to $28 million for the quarter ended Oct. 31. Skillsoft's total revenue dropped 6% to $129 million in the three-month period and reported a net loss of $41 million. The company's roughly $582 million loan due in 2028 was quoted Tuesday at 65.25 cents on the dollar, down from 81.875 cents on Dec. 2, according to data compiled by Bloomberg. Apollo Global Management's John Zito left the audience of investors stunned. Addressing a gathering in Toronto last fall, he said that the real threat for private capital markets wasn't tariffs, inflation or a prolonged period of elevated interest rates. Rather, he said, "the real risk is -- is software dead?" Zito's comments, being reported for the first time, marked a forthright challenge to one of private equity's most entrenched assumptions. For years, investors have funneled hundreds of billions into software businesses, banking on steady growth and resilient, recurring revenues. But the artificial intelligence revolution is now testing that foundation. As worries mount, firms including Arcmont Asset Management and Hayfin Capital Management have hired consultants to check their portfolios for businesses that could be vulnerable, according to people with knowledge of the matter. Apollo cut its direct lending funds' software exposure almost by half in 2025, from about 20% at the start of the year. The uncertainty about the eventual winners and losers is roiling multiple markets. On Tuesday, stocks seen as vulnerable to AI dropped after Anthropic released a new tool, exacerbating worries about disruption to businesses. In recent days, Blue Owl Capital Inc. revealed huge outflows from a tech-focused fund, and two European software firms put loan deals on ice. While various business models are threatened, software-as-a-service is particularly vulnerable. AI-native firms can often offer quicker and cheaper solutions, meaning companies that once operated in a defensible sector are now at risk of competition from new players. Anthropic's Claude Code and other "vibe-coding" startups are disrupting traditional SaaS by allowing users with no coding experience to build software. That's dramatically lowering the programming skill barrier and undermining rigid, one-size-fits-all products. "Technology private equity, in its current form, is dead," Isaac Kim, a partner at venture capital firm Lightspeed who previously led Elliott Investment Management's tech private equity business, said in a recent LinkedIn post. The sector has been a hugely popular target for buyout firms and their private credit cousins. From 2015 to 2025, more than 1,900 software companies were taken over by private equity buyers in transactions valued at more than $440 billion, according to data compiled by Bloomberg. Deals were easily waved through most investment committees because the model was simple. Revenues are "sticky" because the tech is embedded into businesses, helping with everything from payroll to HR, and the subscription fee model meant predictable cash flows. But now, lenders are zeroing in on how prospective borrowers are dealing with the new technology challengers, according to people familiar with the matter. It's the first question software bosses are being asked during meetings about borrowing, they said. Buying a software business, improving margins and adding leverage "assumes the underlying product remains relevant long enough for financial engineering to work," Kim said in the post. "AI has changed that assumption." Last year, two outsourcing companies, KronosNet and Foundever, fell into difficulty amid increased investor scrutiny around AI. The debt of both is now trading at distressed levels. Bond prices on other software names, including McAfee and ION Platform Investment Group, have tumbled. Also in 2025, CVC Capital Partners' credit unit took the keys of a contact center support business called Sabio Group after its previous owner struggled to find a buyer. "Everyone's focused on these bubble risks, I think the biggest risk is actually the disruption risk," Blackstone's Jon Gray said on Bloomberg TV. "What happens when industries change overnight, like what we saw to the Yellow Pages back in the nineties when the Internet came along." In private markets, debt-laden firms have sought forbearance on borrowings, and big name lenders have slashed valuations on loans to software companies such as Edmentum and Foundever, some to distressed levels. Here's what credit strategists are saying...* UBS: While the timing of future disruption remains uncertain, under an "aggressive AI disruption" scenario, we expect defaults to rise unevenly across markets to 2%-4% in high yield, 6%-8% in leveraged loans, and 12%-13% in private credit. * Citigroup: We initiate an underweight recommendation on software loans, in line with our general cautious positioning in the asset class. In our view, yields in the 6%-8% range for much of the sector mean it has limited appeal beyond real money and CLO investors. * Morgan Stanley: We like shorting loan total return swaps vs. high yield total return swaps on the back of higher software exposure and worse convexity. * Barclays: Software equities are down around 15% YTD, and software BSLs have declined 3-4 points in the past few weeks. At a minimum, this decline could increase the LTVs of the loans that BDCs make to the sector. More serious risks include possible obsolescence of some software borrowers, which could introduce more material asset quality issues in BDC portfolios. Credit Exposure Sentiment in the equity market has grown increasingly bearish. The S&P North American software index fell 15% in January, its biggest monthly decline since October 2008. Private credit's exposure to software may be much higher than some figures suggest. Barclays estimates so-called business development companies -- investment funds that lend directly to firms -- have around 20% of their portfolios tied up with the sector, but others say it's substantially more. "If your software business is in healthcare, the fund classifies it as a healthcare exposure," said Robert Dodd, an analyst at Raymond James. "The software exposure is meaningfully higher than it looks." An additional worry is the software industry's asset-light model. With less physical infrastructure to seize to try recoup money, that can mean bigger losses. Zito's recent comments represent a change in how the AI threat is being assessed. Back in 2022, shortly before Hellman & Friedman and Permira paid just over $10 billion to buy Zendesk Inc., the software firm's board of directors set out the risks the firm was facing. They cited a potential recession, persistently high inflation and economic headwinds. Not mentioned: AI. Just over a week after the sale closed in November 2022, ChatGPT launched. But firms under threat aren't just sitting back. Many have harnessed the technology themselves, and for those that do it effectively, AI could be a boon. Annual recurring revenue from Zendesk's in-house AI offering, for example, now exceeds $200 million, amounting to 10% of revenue, a person with knowledge of the matter said. Some firms expect AI will help them to reduce costs. Brian Ruder, co-CEO of Permira, says there are risks, but the concern has been overdone. "If you look back at previous platform shifts in technology, history tells us there will be winners and losers on both sides of the AI-native and incumbent SaaS equation," he said. In the boom times, star businesses such as Coupa Software and Cloudera traded at almost 60 times earnings, according to data from Pitchbook. In 2025, software-as-a-service firms were bought by private equity at an average multiple of 18 times, down from 24 the previous year. The software industry's "halo of invulnerability" has been inappropriate for some time, said Robin Doumar, founder of private credit manager Park Square, adding that metrics like huge earnings multiples "defy financial logic." "That chapter I hope has come to a close."

Global software stocks hit by Anthropic wake-up call on AI disruption

MILAN, Feb 4 (Reuters) - European and U.S. software stocks struggled to find support on Wednesday as a sector-wide selloff spread to Asia, fuelled by mounting worries that advances in artificial intelligence could upend companies' business models. European data analytics, professional services and software stocks fell for a second day in volatile trade, mirroring losses in global peers, after Anthropic's new legal artificial intelligence model underscored the threat to businesses seen as most exposed to AI disruption. Britain's RELX (REL.L), opens new tab and the Netherlands' Wolters Kluwer (WLSNc.AS), opens new tab - major providers of analytics to the legal industry - dropped about 3% in morning trade before paring some losses, after plunging more than 14% and 12% respectively on Tuesday. Shares of U.S. software and services firms (.SPLRCIS), opens new tab were mixed in premarket trading after a near 13% slide over five straight sessions. Nasdaq-listed Thomson Reuters , the parent company of Reuters News, was flat in light volume after Tuesday's record 16% slump on fears that AI could threaten its core legal division. London Stock Exchange Group (LSEG.L), opens new tab slid as much as 6.9%, extending Tuesday's near 13% drop. Indian IT exporters (.NIFTYIT), opens new tab also fell sharply, while Japanese software and systems developers NEC (6701.T), opens new tab, Nomura Research (4307.T), opens new tab and Fujitsu (6702.T), opens new tab sank between 8% and 11%, dragging the Nikkei (.N225), opens new tab benchmark index lower overnight. The rout comes amid wider concern that a tech bubble could burst, posing financial stability risks. JP Morgan analyst Toby Ogg said investors were focused on long-term growth questions that stretch far beyond traditional three-year forecasts. "The sector isn't just guilty until proven innocent, but is now being sentenced before trial," he said. "Our sense from investor discussions is that general appetite to step in remains generally low," he added, citing risks including competition from AI-native firms and clients building their own solutions in-house. ANTHROPIC THE SPARK BEHIND THE SELLOFF One trigger for Tuesday's selloff was Anthropic's launch of plug-ins for its Claude Cowork agent on Friday, enabling automated tasks across legal, sales, marketing and data analysis. Advertising stocks - viewed as among the most exposed in European media to AI - also stayed under pressure. France's Publicis (PUBP.PA), opens new tab was last down 3.6% and Britain's WPP (WPP.L), opens new tab lost 3%, both hitting new lows. Shares in SAP (SAPG.DE), opens new tab, Europe's largest software company, dropped more than 3%, a week after a disappointing cloud revenue forecast wiped around $40 billion off its market value. With stellar gains in chipmaker Nvidia (NVDA.O), opens new tab and so-called AI hyperscalers like Microsoft (MSFT.O), opens new tab pushing U.S. stocks to record highs, regulators and policymakers - including the International Monetary Fund and the Bank of England - have warned of the risks of a potential bubble. "All innovation means there is going to be disruption at some point, and we appear to be at a significant point in that journey for software and IT services companies," said Ben Barringer, head of technology research at Quilter Cheviot. "There is a lot of uncertainty around exactly what AI agents can do, and as such, investors are choosing to shun the software market altogether, leaving nowhere to hide." Salesforce , CrowdStrike (CRWD.O), opens new tab, Adobe (ADBE.O), opens new tab each dipped about 0.2% in U.S. premarket trading, while Intuit (INTU.O), opens new tab eased 0.6%. Atlassian Corp (TEAM.O), opens new tab firmed 0.6%. Reporting by Danilo Masoni. Additional reporting by Medha Singh and Siddarth S. Editing by Amanda Cooper, Dhara Ranasinghe and Mark Potter Our Standards: The Thomson Reuters Trust Principles., opens new tab

Private credit stocks plummet on concern about exposure to software industry disrupted by AI

Blue Owl signage outside the Seagram Building at 375 Park Avenue in the Midtown East neighborhood of New York, US, on Tuesday, Jan. 20, 2026. Shares of stocks with significant private credit market holdings were diving on fears about exposure to the industries being disrupted by artificial intelligence, most notably, software. Shares of Blue Owl, TPG, Ares Management and KKR were all down by double digit percentages on Tuesday. Apollo Global was off by 7%. BlackRock shed 5%. Publicly traded software stocks have been slammed this year as investors grew increasingly concerned about AI eating into their future growth and profit margins as companies use programs like Anthropic's Claude Code to build their own software. The iShares Software ETF is down 20% this year, including another 5% decline on Tuesday. UBS analysts estimate 25% to 35% of the private-credit market is exposed to the risk of AI disruption (other sources say that software, specifically, accounts for about 20 percent of outstanding loans for private-direct lenders). By comparison, the high yield corporate bond market (Using the iShares iBoxx High Yield Corporate bond ETF as a proxy) has only 8 percent exposure to technology, reflecting a broader diversification among the syndicated market than the private-credit market.

Private Equity's Giant Software Bet Has Been Upended by AI

Apollo Global Management's John Zito left the audience of investors stunned. Addressing a gathering in Toronto last fall, he said that the real threat for private capital markets wasn't tariffs, inflation or a prolonged period of elevated interest rates. Rather, he said, "the real risk is -- is software dead?" Zito's comments, being reported for the first time, marked a forthright challenge to one of private equity's most entrenched assumptions. For years, investors have funneled hundreds of billions into software businesses, banking on steady growth and resilient, recurring revenues. But the artificial intelligence revolution is now testing that foundation. As worries mount, firms including Arcmont Asset Management and Hayfin Capital Management have hired consultants to check their portfolios for businesses that could be vulnerable, according to people with knowledge of the matter. Apollo cut its private credit funds' software exposure almost by half in 2025, from about 20% at the start of the year. The uncertainty about the eventual winners and losers is roiling multiple markets. In recent days, Microsoft Corp. shares dropped on concern that its massive outlay on AI won't bring as big a payoff as once hoped, Blue Owl Capital Inc. revealed huge outflows from a tech-focused fund, and two European software firms put loan deals on ice. While various business models are threatened, software-as-a-service is particularly vulnerable. AI-native firms can often offer quicker and cheaper solutions, meaning companies that once operated in a defensible sector are now at risk of competition from new players. Anthropic's Claude Code and other "vibe-coding" startups are disrupting traditional SaaS by allowing users with no coding experience to build software. That's dramatically lowering the programming skill barrier and undermining rigid, one-size-fits-all SaaS products. "Technology private equity, in its current form, is dead," Isaac Kim, a partner at venture capital firm Lightspeed who previously led Elliott Investment Management's tech private equity business, said in a recent LinkedIn post. The sector has been a hugely popular target for buyout firms and their private credit cousins. From 2015 to 2025, more than 1,900 software companies were taken over by private equity buyers in transactions valued at more than $440 billion, according to data compiled by Bloomberg. Deals were easily waved through most investment committees because the model was simple. Revenues are "sticky" because the tech is embedded into businesses, helping with everything from payroll to HR, and the subscription fee model meant predictable cash flows. But now, lenders are zeroing in on how prospective borrowers are dealing with the new technology challengers, according to people familiar with the matter. It's the first question software bosses are being asked during meetings about borrowing, they said. Buying a software business, improving margins and adding leverage "assumes the underlying product remains relevant long enough for financial engineering to work," Kim said in the post. "AI has changed that assumption." Last year, two outsourcing companies, KronosNet and Foundever, fell into difficulty amid increased investor scrutiny around AI. The debt of both is now trading at distressed levels. Bond prices on other software names, including McAfee and ION Platform Investment Group, have tumbled. Also in 2025, CVC Capital Partners' credit unit took the keys of a contact centre support business called Sabio Group after its previous owner struggled to find a buyer. "Everyone's focused on these bubble risks, I think the biggest risk is actually the disruption risk," Blackstone's Jon Gray said on Bloomberg TV. "What happens when industries change overnight, like what we saw to the Yellow Pages back in the nineties when the Internet came along." In private markets, debt-laden firms have sought forbearance on borrowings, and big name lenders have slashed valuations on loans to software companies such as Edmentum and Foundever, some to distressed levels. Last Thursday, Blue Owl revealed in a filing that investors have pulled around 15% of net assets from one of its funds. Exposure Private credit's exposure to software may be much higher than some figures suggest. Barclays estimates so-called business development companies -- investment funds that lend directly to firms -- have around 20% of their portfolios tied up with the sector, but others say it's substantially more. "If your software business is in healthcare, the fund classifies it as a healthcare exposure," said Robert Dodd, an analyst at Raymond James. "The software exposure is meaningfully higher than it looks." An additional worry is the software industry's asset-light model. With less physical infrastructure to seize to try recoup money, that can mean bigger losses. Zito's recent comments represents a change in how the AI threat is being assessed. Back in 2022, shortly before Hellman & Friedman and Permira paid just over $10 billion to buy Zendesk Inc., the software firm's board of directors set out the risks the firm was facing. They cited a potential recession, persistently high inflation and economic headwinds. Not mentioned: AI. Just over a week after the sale closed in November 2022, ChatGPT launched. But firms under threat aren't just sitting back. Many have harnessed the technology themselves, and for those that do it effectively, AI could be a boon. Annual recurring revenue from Zendesk's in-house AI offering, for example, now exceeds $200 million, amounting to 10% of revenue, a person with knowledge of the matter said. Some firms expect AI will help them to reduce costs. Brian Ruder, co-CEO of Permira, says there are risks, but the concern has been overdone. "If you look back at previous platform shifts in technology, history tells us there will be winners and losers on both sides of the AI-native and incumbent SaaS equation," he said. In the boom times, star businesses such as Coupa Software and Cloudera traded at almost 60 times earnings, according to data from Pitchbook. In 2025, software-as-a-service firms were bought by private equity at an average multiple of 18 times, down from 24 the previous year. The software industry's "halo of invulnerability" has been inappropriate for some time, said Robin Doumar, founder of private credit manager Park Square, adding that metrics like huge earnings multiples "defy financial logic." "That chapter I hope has come to a close."

Software scramble shows the next phase of AI disruption is here

Why it matters: The software selloff dragged down the entire market on Tuesday -- it's the first example of how the market will respond when presented with evidence that AI could disrupt or even replace an entire industry. Driving the news: Software stocks slid after Anthropic rolled out new AI automation capabilities for several different sectors of enterprises. * Selling started in legal software/data-adjacent names, including Experian, the London Stock Exchange Group, Thomson Reuters and LegalZoom, then broadened across the sector. * The iShares Expanded Tech-Software Sector ETF (IGV) is down more than 14% over the past six sessions, following a 15% drop in January (its worst month since 2008). What they're saying: Software sentiment is the "worst ever," according to a note from Jefferies. * It's "radioactive," Anurag Rana of Bloomberg Intelligence tells Axios. * While AI is disrupting the sector, there is still an acknowledgement that there could be winners and losers. * But it's not clear who will survive, so investors are getting out entirely. Between the lines: Anthropic sees itself as a complement rather than as a competitor to software providers. * Anthropic is able to securely connect with other tools and applications, meaning it can be your "home page" of sorts while you interact with any number of software services running through the back end. * Claude can "render interfaces directly within it," so it could theoretically "drive even more engagement and interactivity... with all these other business systems," Scott White, head of product for enterprise at Anthropic, tells Axios. Threat level: AI could of course replace those software services entirely at some point. * "Our concern is that the seat-compression and vibe coding narratives could set a ceiling on multiples," Billy Fitzsimmons, analyst at Piper Sandler, wrote in a note. Reality check: It's not the first time Wall Street has turned sour on software. * Mobile was once set to threaten Microsoft's software business as everyone was going to be spending time on phones, not desktops. * Microsoft's stock is up 789% over the last decade, so it clearly survived. * This "happens a lot" within software, and there's not much companies can do to fix it, Bloomberg Intelligence's Rana says. What we're watching: How long the software-apocalypse lasts.

Tech stocks go into freefall as it dawns on traders that AI has the ability to cut revenues across the board | Fortune

Until very recently, the narrative around AI was that the $600 billion of annual corporate capital expenditure ("capex") fuelling it was good for stocks in the short term. The companies receiving that money as new revenue (AI model makers, data center constructors, and the energy companies supplying them) would be the immediate beneficiaries. The efficiencies delivered by AI would be good for tech and non-tech companies alike. The Big Tech hyperscalers have always argued that the demand from their revenue-paying clients far exceeded their ability to supply AI services. That narrative was turned on its head in the last 24 hours as it dawned on traders that AI also has the ability to reduce the revenues of a vast range of adjacent tech companies. The argument -- advanced by Palantir CEO Alex Karp and CTO Shyam Sankar on their recent earnings call -- is that AI is now so good at writing or managing enterprise software that it threatens to make irrelevant a range of tech companies that have, for years, enjoyed recurring revenues by providing enterprise apps to companies on a software-as-a-service (SaaS) basis. That led to a widespread sell-off of tech stocks, wiping away $300 billion in market cap in a single session. S&P 500 futures were flat this morning after closing down 0.84% last night. SaaS companies took major hits: Microsoft closed down 2.87%, SAP was down 3.29% this morning on the German market, Salesforce lost 6.85% yesterday and was further down in overnight trading, ServiceNow was down 6.97% yesterday and was marginally lower overnight, also. Palantir's Sankar said on the call that his company's "AI Forward Deployed Engineer" product -- which allows clients to manage software and code bases through natural language commands -- is able to reduce the time it takes to complete "complex SAP ERP migrations" from "years of work" to "as little as 2 weeks." (ERP stands for "enterprise resource planning," and it refers to a service offered by SAP around helping companies transition from aging legacy systems into new ones.) Karp added, "In the American market, we have inbound [requests from clients] where people have already seen proof points at other companies and not on one use case," he said. "[There is] a myriad of use cases." Jefferies analysts Akshat Agarwal and Ayush Bansal -- who focus on Indian enterprise tech companies -- published a note this morning arguing that AI has the ability to reduce the revenues of a wide range of tech companies: "Anthropic's Cowork plug‑ins and Palantir's claims of faster SAP migrations highlight how AI could potentially erode application service revenues for IT firms. With application services being 40-70% of revenues [for tech companies in India], IT firms face growth pressures. Consensus growth estimates don't fully reflect this, posing downside risk to valuations," they warned. Claude Cowork is like a general purpose work assistant that can organize tasks and files autonomously. "Software stocks have been correcting on the back of this, however, we believe the impact of this could extend well beyond software-potentially disrupting downstream application‑managed services (AMS) revenues for IT services firms." "Our checks suggest that use of AI is clearly compressing migration timelines which in turn may drag application implementation revenues for IT services firms," they added. "AI is going to be drag on revenue growth of IT firms over the next one to two years." Ed Yardeni of Yardeni Research made a similar argument in a note to his clients: "Software stocks were especially hard hit because Anthropic rolled out new tools for its Cowork product. It's too soon to tell how useful the new tools will be, but investors decided to cut the valuation multiples of software stocks." SAP was approached for comment.

'Get me out': Traders dump software stocks as AI fears erupt

Wall Street has been skeptical about software stocks for a while, but sentiment has gone from bearish to doomsday lately with traders dumping shares of companies across the industry as fears about the destruction to be wrought by artificial intelligence pile up. "We call it the 'SaaSpocalypse,' an apocalypse for software-as-a-service stocks," said Jeffrey Favuzza, who works on the equity trading desk at Jefferies. "Trading is very much 'get me out' style selling." The anxiety was underscored Tuesday after AI startup Anthropic released a productivity tool for in-house lawyers, sending shares of legal software and publishing firms tumbling. Selling pressure was evident across the sector with London Stock Exchange Group, which has a large data analytics business, falling 13%, while Thomson Reuters plunged 16%. CS Disco sank 12%, and Legalzoom.com plummeted 20%. Perceived risks to the software industry have been simmering for months, with the January release of the Claude Cowork tool from Anthropic supercharging disruption fears. Video game stocks got caught up in the slide last week after Google-owner Alphabet began to roll out Project Genie, which can create immersive worlds with text or image prompts. All told, the S&P North American software index is on a three-week losing streak that pushed it to a 15% drop in January, its biggest monthly decline since October 2008. "I ask clients, 'what's your hold-your-nose level?' and even with all the capitulation, I haven't heard any conviction on where that is," Favuzza said. "People are just selling everything and don't care about the price." The concerns are brewing in private equity as well, with firms including Arcmont Asset Management and Hayfin Capital Management hiring consultants to check their portfolios for businesses that could be vulnerable, according to people with knowledge of the matter. Apollo cut its direct lending funds' software exposure almost by half in 2025, from about 20% at the start of the year. Among U.S. public companies, so far this earnings season just 67% of software companies in the S&P 500 have beaten revenue expectations, according to data compiled by Bloomberg. That compares with 83% for the overall tech sector. While all software stocks have beaten earnings expectations, that's mattered little in the face of concerns about long-term prospects. For example, Microsoft reported solid earnings last week, but investors' focus on slowing growth in cloud sales put fresh scrutiny on the amount it's spending on AI, sending the stock tumbling 10% on Thursday. January was the worst month for Microsoft shares in more than a decade. Meanwhile, earnings reports from ServiceNow and SAP gave investors additional reasons to be cautious about growth prospects for software companies. Microsoft fell 2.9% on Tuesday, its fourth straight negative session. On the flip side, Palantir Technologies gave a bullish revenue forecast when it reported earnings after the bell on Monday. It also posted fourth-quarter revenue growth of 70%, exceeding Wall Street estimates. Shares rose 6.9%. "The fear with AI is that there's more competition, more pricing pressure, and that their competitive moats have gotten shallower, meaning they could be easier to replace with AI," said Thomas Shipp, head of equity research at LPL Financial, which has $2.4 trillion in brokerage and advisory assets. "The range of outcomes for their growth has gotten wider, which means it's harder to assign fair valuations or see what looks cheap." Those AI-related fears led Piper Sandler to downgrade software firms Adobe, Freshworks and Vertex on Monday. To be sure, some investing pros view the sell-off in software stocks as an opportunity. The Sycomore Sustainable Tech fund, a European open-end fund that has beaten 99% of its peers over the past three years, bought Microsoft shares amid the downturn on the expectation that the company will eventually emerge as an AI winner. It doesn't hurt that the software giant's stock looks cheap at the moment, trading for less than 23 times estimated earnings, the lowest in about three years. The central issue facing investors who want to buy software stocks is separating the AI winners from the losers. Clearly, some of these companies are going to thrive, meaning their stocks are effectively on sale after the recent rout. But it may be too early to determine who they are. "The draconian view is that software will be the next print media or department stores, in terms of their prospects," said Favuzza at Jefferies. "That the pendulum has swung so far to the sell-everything side suggests there will be super-attractive opportunities that come out of this. However, we're all waiting for an acceleration, and when I look out to 2026 or 2027 numbers, it is hard to see the upside. If Microsoft is struggling, imagine how bad it could be for companies more in the path of disruption, or without its dominant position." Bloomberg's Subrat Patnaik, David Watkins and Stephen Kirkland contributed.

Software Stocks Hit as AI Jolts Pricing Power | Investing.com UK

The software selloff this week should not be a mystery. It is markets doing what they always do when a structural shift becomes impossible to ignore: repricing, fast and without sentiment. What investors are reacting to is not fear of AI. It is a reassessment of what software businesses can realistically charge in an AI-first world. The trigger may have been the release of a new AI automation capability from Anthropic, but the response was already building. The market was primed. The spark simply exposed how fragile many software valuations have become. For years, software enjoyed a privileged status. Subscription models were treated as inherently resilient. Recurring revenues were assumed to be sticky. Complexity was mistaken for defensibility. AI dismantles those assumptions. When intelligent agents can perform legal review, data analysis, research and compliance instantly, the justification for high-priced licences weakens. When outputs become faster, cheaper and widely accessible, pricing power erodes. Markets understand this, even if many boardrooms still resist it. The selloff reflects investors questioning whether decades-old assumptions around recurring revenues still hold. It is a margin debate, not an innovation debate. Innovation is abundant. Scarcity is not. Software valuations have long rested on the idea that once a company embedded itself in a workflow, it became indispensable. AI breaks that lock-in. Switching costs fall. Interfaces become optional. Outcomes matter more than platforms. This is why the speed of the repricing matters. Investors are not waiting for earnings downgrades or guidance cuts. They are moving ahead of them. AI accelerates disruption faster than quarterly results can capture. There is also a broader point here about bargaining power. AI shifts leverage away from software vendors and toward users. When a task can be performed by an agent rather than a product suite, buyers gain choice. Choice compresses margins. That dynamic is now being reflected in valuations. Importantly, this is not a blanket rejection of technology stocks. It is differentiation at work. Markets are drawing a clear line between companies that own AI economics and those that merely integrate AI to defend existing models. Owning AI economics means controlling the model, the infrastructure, the monetisation layer. Integrating AI often means passing efficiency gains directly to customers. Investors understand the difference, and they are pricing it in. Another pressure point is revenue durability. Many software firms grew by monetising information asymmetry, process friction or labour intensity. AI strips those away. What remains must justify its price on output alone. That's a far harsher test. The repricing also exposes how incumbency can become a liability. Scale built around legacy platforms, high headcount or complex workflows does not automatically translate into resilience. In some cases, it magnifies exposure. None of this suggests the end of software. It signals the end of complacency. Software can still be highly profitable. It can still scale. But its value will increasingly depend on defensibility, not familiarity. On economics, not narratives. Markets are adjusting to that reality in real time. AI removes the insulation that once protected software margins. What looked stable now looks exposed. Investors are acting accordingly, because waiting carries more risk than moving early. This selloff marks a turning point. Valuation theory is catching up with technological reality. And once that adjustment begins, it rarely reverses.