Software Stocks Lose 33% of Value as AI Threatens Business Models

(P1) The enterprise software sector has erased nearly a third of its value as investors re-evaluate business models in an era of advanced artificial intelligence, pushing valuations back to where they stood before the launch of OpenAI’s ChatGPT.

(P2) "The software group has been under severe valuation pressure recently due to fears that generative AI technology makes their collective business models easy to replicate and undermine,” said Richard Baldry, senior research analyst at Roth.

(P3) While the S&P 500 has gained 1.8 percent since late February to reach new all-time highs, the iShares Expanded Tech-Software Sector ETF has risen only 0.7 percent over the same period. The divergence comes as AI giants like OpenAI and Anthropic, bolstered by partners such as Amazon, push deeper into the enterprise market.

(P4) The sell-off suggests a potential long-term de-rating for a sector once considered a market leader, with analysts from Trivariate Research arguing that the market is correctly pricing in a skewed-downside risk to software companies' 2030 sales outcomes.

While a recent 10 percent weekly rebound in the software ETF has drawn attention, technical analysts advise caution. “While it may be tempting to jump into the beaten-down software group, at this point, you’re still catching a falling knife,” Bespoke Investment Group co-founders Paul Hickey and Justin Walters said in a note. They argue that the sector must first retake its 50-day moving average before a bottom can be considered.

Jonathan Krinsky, chief market technician at BTIG, agrees, noting that underlying problems in the software sector began well before recent market volatility. Advances in AI have raised fundamental questions about the efficacy of existing products, cybersecurity, and the future of code creation.

Despite the gloom, some of the sector's largest players have shown resilience. Microsoft shares have risen more than 10 percent over the past five days, while Oracle saw a stunning 19.5 percent gain in the same period.

However, the broader technical picture remains weak. “The sector remains in a downtrend and still has technical damage to repair before evidence aligns for a bottom,” said Adam Turnquist, chief technical strategist for LPL Financial. He added that while improving momentum and volume trends suggest selling pressure may be easing, several resistance levels remain.

This article is for informational purposes only and does not constitute investment advice.