The artificial intelligence (AI) boom has been going on for quite a while now, and while it’s been several years since ChatGPT took the world by storm (can you believe it’s been more than three years now since OpenAI gave us that profound sense of awe?), the AI landscape continues to move at a ridiculous pace. And, as always, there are going to be huge winners and losers when the tides move so quickly. Arguably, we’ve already had more than a handful of massive, multi-bagger winners, especially in the realm of hardware (semiconductors specifically).
Of course, there have been other data centre stocks that have risen to the occasion, as well as some unforeseen plays. And while there are still plenty of winners that will rise out of this generational shift in tech, we’ve begun to witness some serious losers to start off the new year. As you not doubt have probably guessed, I’m talking about the software companies that have fallen into a severe bear market. Undoubtedly, the software companies that sell seats have had AI pull the rug from underneath them.
Source: Getty Images
The AI revolution is evolving. We’re seeing not just colossal winners, but losers
Even the software titans that do pivot and adapt in the agentic AI age might have other struggles as they potentially cannibalize their own businesses. Either way, it’s a tough place to be in software right now, especially for the legacy names that aren’t what you’d call “AI-native.” At some point, I think the sell-off will be overdone, but I don’t think we’re there yet, and I don’t want to be a hero by looking to not only buy the dip, but the crash.
Personally, I’d be more comfortable waiting for firms to show that they’re adopting AI in a way that drives sales growth or even a bit of margin expansion. In any case, capital expenditures that are through the roof are the name of the game for the AI innovators.
If you’re a bear on AI, the software names might be an undervalued steal right here. But, if you believe in AI and don’t see it as in a bubble, I’d be cautious with the latest software sell-off, as the true long-term implications may not yet be fully understood. It feels like moats were narrowed overnight for the software plays.
Software stocks are losing as AI booms
With Anthropic recently pulling the curtain on a new AI tool that helps legal professionals, it should be no mystery that legal software plays were in the blast zone on Tuesday’s session.
Thomson Reuters (TSX: TRI) took a hit to the chin, falling close to 16% in a single session. Indeed, there’s fear that AI is coming for the firm’s lunch. Could this really be curtains for legal software, though? I guess time will tell, but there’s already so much damage done to shares of TRI. Legal software is a piece of the pie, but investors don’t seem to be willing to hang around to see what happens next.
With the stock down around 56% from its peak already, I think there’s an opportunity to get in at a reasonable 23.6 times trailing price to earnings (P/E). Still, time will tell how Claude and other AI innovators navigate new market verticals next. It’s a scary time for a software investor, but an exciting one for AI investors, even if high capital expenditures remain a worry for a while longer.
Personally, I think Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) stock is the perfect AI play. It’s got Gemini and could bring more pain to some of the incumbent software names in the coming year. Though it’s hard to tell what else Google has up its sleeves, I still think the stock is worth picking up, especially if you’re a big believer in Google DeepMind, which is the research-focused subsidiary that could keep Google leading the AI race for the long run.
Just how much longer will AI eat software’s lunch? It’s hard to tell. Either way, I’d much rather be in the disruptor, with Alphabet at a richer price, than in a software firm at a “bargain.”
