In the tumultuous week of US stocks, tech stocks, especially SaaS software stocks, suffered an unprecedented crash.
Software leaders like $Salesforce.com(CRM)$ $Workday(WDAY)$ $UiPath(PATH)$ saw their share prices drop over 20% after releasing earnings reports and warning customers to be cautious about long-term software orders.
Even though most software companies didn't directly blame AI for their slower growth prospects, AI undoubtedly played a role.
The AI boom has two-sided effects on software companies:
On one hand, with AI seen as the ultimate force in future technology development, software companies have to step up their transformation efforts to avoid falling behind, undoubtedly affecting capital expenditures in other areas like marketing.
On the other hand, software companies' clients are also investing heavily in AI, and the funds poured into AI are squeezing investments in traditional software.
The software industry's attitude towards AI is also quite complex:
Some supporters believe that AI can serve as a driving force, helping established software companies enhance the functions and services of their existing products and achieve leapfrog growth.
The others argue that AI might disrupt existing software companies because AI can automate many tasks, reducing reliance on traditional software, or emerging AI companies might offer similar services at lower costs.
However, regardless of the impact, the transition to AI will likely take years, and it's still too early to judge how and when companies will shift from existing enterprise software companies to new AI services. Due to concerns about the accuracy and costs of large models, many companies are currently taking a wait-and-see approach towards investing in AI-driven services, so the short-term impact on software spending may be minimal.
Therefore, some analysts believe that the market's panic reaction may have been overly drastic.
Some investors see this as a buying opportunity. Scott Berg, a stock analyst at Needham & Co., pointed out:
Salesforce's valuation, calculated based on multiples of free cash flow, is at a historic low of 16 times, while investors have typically been willing to pay 20 to 25 times.
It's worth mentioning that some software companies have only made minor adjustments to their growth forecasts this year.
Salesforce lowered its forecast for full-year subscription and support revenue growth from "about 10%" to "slightly below 10%," without changing its forecast for overall revenue growth. Workday also lowered its guidance for next year's subscription revenue growth by only about 1% from the previously set 18%.
Brad Zelnick, a software analyst at Deutsche Bank, believed:
The collective slump in software stocks indicates that investors are reducing their expectations about how quickly and extensively software companies will benefit from integrating AI into their products.
Others on Wall Street are more pessimistic. Tobias Francis, the founder of Atlas Wealth Management, said, "AI tools enable an entire generation of startups to build large company clones with small teams and offer them at 10% of the cost."
Salesforce CEO Marc Benioff supported the bullish view on AI. He said that AI models licensed from companies like OpenAI will "unlock more business potential" for Salesforce by integrating different functions like sales, marketing, and customer service.
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