January has gone by so quickly, and if you haven’t yet contributed another $7,000 to your TFSA for 2026, now seems like as good a time as any. Undoubtedly, the broad markets have been quite resilient to start the year, but there has been a lot of action going on behind the scenes, with software stocks taking a massive dive as a result of AI fears. Indeed, there seems to be a bit of a paradox of sorts going on.
On the one hand, AI models and tools, especially the coders, are causing fears to go down the spines of investors in the software stocks. Undoubtedly, AI is really changing the game, and the massive devaluation in the software-as-a-service (SaaS) companies is a bit of a shocker. And, on the other hand, there’s fear that AI capital expenditures might not have a sufficient enough pay-off, and the heavy spenders ought to be punished.
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AI just powered a software slump, but is it overdone
If AI is bubbly and less monetizable over the medium term, perhaps the software sell-off is overdone. At the same time, though, AI infrastructure stocks and OpenAI- or Anthropic-adjacent names should be soaring. In any case, it certainly feels like investors are overweighing the bear case on both sides of the equation. And for stock pickers, I believe there’s an opportunity to be had.
Though the AI tools certainly have disruptive potential, there might also be a bit of an overreaction going on, given the damage that’s already been dealt to the SaaS plays going into 2026. The AI is “eating software’s lunch” thesis is a scary one for software investors, but it’s not like SaaS firms are going to go down without a fight. And, of course, their products aren’t going to zero overnight, although the seat model could introduce significant pressure in coming quarters, especially for the firms slow to adopt agentic AI.
Constellation Software
Constellation Software (TSX: CSU) is crashing quite hard, now down close to 51% from its highs. Undoubtedly, if you held all the way down, you might be tempted to bail right here, especially as AI disrupts software. Though I do think AI tools and “vibe coding” will eventually weigh heavily on the software plays, I do think that the selling is now overdone.
Also, I think investors are underestimating management’s ability to pivot and get on the right side of the AI shift. I think Constellation has what it takes to double down on AI so that it can actually unlock big efficiencies across the board.
Either way, there’s a great deal of risk, especially if the software slump is far from over. Could it be a multi-year implosion? Possibly. If so, I’d be an incremental buyer of weakness. At 57.9 times trailing price-to-earnings (P/E), the shares still seem a tad expensive, but it might not be low until they’re a bargain, especially if the pace of losses continues.
In any case, I’m starting to think the software plays are more of an “anti-AI” trade. If the disruptive wave of AI innovation proves overhyped, perhaps the software plays might not be in as much trouble as recent action in the software stocks suggests. Personally, I think Constellation should start making more deals while it’s cheaper to do so. Software plays are going for cheap, and potential acquirers could stretch their dollar pretty far, as smaller firms seek guidance for navigating the AI era.
