According to Simon Adler, Global Head of Value Equities and Portfolio Manager at Schroders, market concerns about the impact of artificial intelligence on software company prospects have led to significant share price declines for some industry leaders. However, a falling share price does not automatically signal the emergence of value, and the software sector's valuations are still not considered cheap.
The firm emphasizes the need for extreme discipline when analyzing companies that appear inexpensive based on their historical profitability. Simon notes that technology has not traditionally been seen as a domain for value investing in the eyes of most investors, and value investing is not merely about buying "old economy" stocks in sectors like finance, energy, and mining. The definition of "value" has evolved over time, both in theory and in practice. What is a market darling today may quickly be perceived as outdated tomorrow, and vice versa.
Taking tech stocks as an example, at the peak of the dot-com bubble in early 2000, the top ten U.S. tech companies by market capitalization were Microsoft, Cisco, Intel, IBM, AOL, Oracle, Dell, Sun Microsystems, Qualcomm, and Hewlett-Packard. Collectively, they accounted for a quarter of the S&P 500's market value. The market's optimism towards these ten companies, and many other tech firms, largely stemmed from their successful disruption of their operational fields—or, as supporters at the time claimed, they represented a "new paradigm."
However, Schroders points out that this thinking, both then and now, often overlooks a key point: disruptors themselves are eventually disrupted by newcomers.
The recent downturn in software stock prices, driven by fears of AI disintermediation, has led investors to question whether "large-cap software stocks" present an excellent opportunity for value portfolio managers. Over the 12 months ending March 2026, the MSCI Software Industry Index fell nearly 9%, while the broader index rose 19%. Simon states that a price decline in itself does not necessarily indicate the emergence of "value." Although the software sector's cyclically adjusted price-to-earnings ratio has retreated from a high near 70 times, it currently remains at 56 times—this does not signify that the entire sector has become absolutely cheap.
As value investors, Schroders believes that maintaining a high degree of discipline is crucial when analyzing companies that seem cheap based on past profitability. For comparison, the average CAPE multiple Schroders pays when adding stocks from any sector to its portfolio is only 9.1 times. Even when buying technology stocks, the average purchase valuation is just 10.2 times.
Simultaneously, Schroders also notes that sector average valuations do not tell the whole story. The firm maintains a keen awareness of potential contrarian opportunities within areas of the industry perceived as "AI losers." Schroders is currently closely studying several companies in this category and will continue to adhere to discipline, only considering those companies with low valuation multiples relative to their historical earnings and cash flow.
Fundamental valuation remains the guiding principle, and a significant price drop from previous highs is far from sufficient on its own.
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