AI Sparks Existential Crisis for Software Stocks

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Anthropic, an advanced artificial intelligence company, is making waves. Its top AI is so good that it has caused Wall Street to second-guess an entire sector.
The buzz started with Anthropic’s coding tool, Claude Code, which has wowed many programmers with its ability to automate tedious coding tasks, saving a huge amount of time. With Claude Code, a human worker manages autonomous AI coding “agents,” which take on multi-step tasks, checking in when necessary. The tool can read and write its own files, saving a trove of useful documentation for later. OpenAI, Gemini and others have similar tools.

Last month, Anthropic unveiled a product that brings these AI features to knowledge work. Claude Cowork, a chatbot built to act like a talented personal assistant, can access files and data on a computer to organize a messy desktop, create a spreadsheet or summarize meeting notes. Users set permissions and pick what files and data can be accessed. Built for nontechnical users, it’s sure to be popular.

It was the Cowork announcement that sent shockwaves through the business software market, sparking a sell-off of a category known as subscription software as a service, or SaaS. Companies caught in the crosshairs included Salesforce, Adobe, Workday, ServiceNow, SAP, Oracle and DocuSign. Sector-specific software, in legal, finance, tax, IT and other areas, was hit too.

Consider several major fears for the software industry. One is that AI chatbots become capable of replacing subscription cloud apps for finance, design, sales, project management and more. Another is that AI coding tools mean that companies will opt to build custom software rather than purchase it. Finally, there’s the risk of increased competition and pricing pressure, as the proliferation of AI tools makes it easy for start-ups to enter the business software market.

The traditional approach to buying subscription software is based on headcount, since it’s priced per user. Businesses usually need an entire staff to use Microsoft 365 or have access to Zoom videoconferencing. An entire sales team may need access to Salesforce’s customer management product. But what happens when an AI coworker, or multiple AI coworkers, can do the task of many people? A growing concern is that these new automated AI tools, which keep getting better, will disrupt the entire SaaS pricing system.

It’s clear that programmers who use AI coding tools see huge potential and quick productivity gains. It changes the workflow of a software engineer “as completely as it could be changed,” said Noah Brier, the co-founder of Alephic, an AI consulting company, in a recent Bloomberg podcast. Unlike some other areas of work, coding is verifiable and can be checked to see whether something works or not. That makes it ideal for automation.

AI’s coding output could soon affect headcounts at large tech companies. Expect efforts to streamline technical staff while chasing higher productivity. There will also be pressure on top software vendors to shrink their workforces.

However, some stock analysts are skeptical of the gloom and doom. “We believe the fears of broad disruption to software vendors are largely overstated,” writes Arjun Bhatia, analyst at William Blair, in a recent research note.

Software companies that perform general tasks are likely most at risk, while some analysts believe the fears are overblown for specialized software. Companies in domain-specific areas are more resilient, notes Siti Panigrahi, analyst at Mizuho Americas, in a recent note. Such vendors, like Autodesk, Bentley Systems, Cadence Design Systems and Synopsys, include deep technical knowledge and complex decision-making systems. Plus, these types of companies focus on high accuracy, regulatory compliance and proprietary data, notes Panigrahi.

Software companies aren’t standing still. Major vendors, such as Salesforce, are quickly integrating AI, while continuously updating features across the board. Internally built systems for customer management, IT services and human resources “will simply not be able to keep up with the vendors that focus on these areas,” writes Bhatia.

Even if the fear of disruption is overblown, expect more competition and continued turmoil in markets, as AI spooks sectors ranging from wealth management and financial data to medical software and legal services.

This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.

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