The rise of AI poses a threat to software stocks. A powerful enough AI can customise a company’s software, or at least call into question the value of standardised software that costs more than an AI subscription and doesn’t fully suit a business’s operating needs. Some companies may switch to AI to disintermediate software altogether, which would mean less revenue for software companies.
But the reality is that most software stocks are still reporting revenue growth. That’s because the stock market is forward looking, and prices in the future impact on software fundamentals well in advance. That said, investors may have gotten too pessimistic on software and too optimistic on AI. In July, overleveraged AI bets got unwound and software stocks soared. The proxy VanEck Semiconductor ETF (SMH) fell 8.61% since 1 July, while software proxy WisdomTree Cloud Computing Fund (WCLD) rose 22.69% over the same period.
Big gains in AI trades were met with big drops in software stocks. The two sat at opposite ends of the performance scale among S&P 500 constituents. So while investors may think that holding both AI and software stocks offers diversification, the fact is the two probably neutralised each other.
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