(Bloomberg) — Wall Street has been skeptical about software stocks for a while, but sentiment has gone from bearish to doomsday lately with traders gripped by fears about the destruction to be wrought by artificial intelligence.
“We call it the ‘SaaSpocalypse,’ an apocalypse for software-as-a-service stocks,” said Jeffrey Favuzza, who works on the equity trading desk at Jefferies. “Trading is very much ‘get me out’ style selling.”
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The issue was underscored last week, when a historic selloff in shares of Microsoft (MSFT) Corp. showed that even the biggest names aren’t immune from the pressure. In addition, Take-Two Interactive Software (TTWO) Inc. posted its worst week since November 2022 after plummeting 10% alongside other video-game stocks after Alphabet Inc. began to roll out Project Genie, which can create immersive worlds with text or image prompts.
Perceived risks to the software industry have been piling up. The January release of a new AI tool from startup Anthropic has supercharged the disruption fears, with its latest tool for the firm’s in-house lawyers sending shares of legal software companies tumbling on Tuesday. The S&P North American software index is on a three-week losing streak that pushed it to a 15% drop in January, its biggest monthly decline since October 2008.
“I ask clients, ‘what’s your hold-your-nose level?’ and even with all the capitulation, I haven’t heard any conviction on where that is,” Favuzza said. “People are just selling everything and don’t care about the price.”
So far this earnings season, just 71% of software companies in the S&P 500 have beaten revenue expectations, according to data compiled by Bloomberg. That compares to 85% for the overall tech sector. While all software stocks have beaten earnings expectations, that’s mattered little in the face of concerns about long-term prospects.
For example, Microsoft reported solid earnings on Wednesday, but investors’ focus on slowing growth in cloud sales put fresh scrutiny on the amount it’s spending on AI, sending the stock tumbling 10% on Thursday. January was the worst month for Microsoft shares in more than a decade. Meanwhile, earnings reports from ServiceNow Inc. and SAP SE gave investors additional reasons to be cautious about growth prospects for software companies.
On the flipside, Palantir (PLTR) Technologies Inc. gave a bullish revenue forecast when it reported earnings after the bell on Monday. It also posted fourth-quarter revenue growth of 70%, exceeding Wall Street estimates.
“The fear with AI is that there’s more competition, more pricing pressure, and that their competitive moats have gotten shallower, meaning they could be easier to replace with AI,” said Thomas Shipp, head of equity research at LPL Financial, which has $2.4 trillion in brokerage and advisory assets. “The range of outcomes for their growth has gotten wider, which means it’s harder to assign fair valuations or see what looks cheap.”
Those AI-related fears led Piper Sandler to downgrade software firms Adobe (ADBE) Inc., Freshworks (FRSH) Inc., and Vertex (VRTX) Inc. on Monday. “Our concern is that the seat-compression and vibe coding narratives could set a ceiling on multiples,” analyst Billy Fitzsimmons wrote.
To be sure, some investing pros view the selloff in software stocks as an opportunity. The Sycomore Sustainable Tech fund, a European open-end fund that has beaten 99% of its peers over the past three years, bought Microsoft shares amid the downturn on the expectation that the company will eventually emerge as an AI winner.
It doesn’t hurt that the software giant’s stock looks cheap at the moment, trading for less than 24 times estimated earnings, the lowest in about three years. And from a technical perspective, its 14-day relative strength index is approaching oversold levels. More broadly, the software index’s multiple is the lowest in years, and its RSI indicates it’s oversold.
The software sector is “probably oversold enough for a bounce,” Jonathan Krinsky, BTIG’s chief market technician, wrote in a note to clients last week. However, he added, “it is going to take a long time to repair and build a new base,” and that “we have not been fans of software for a while given the deteriorating relative strength that really accelerated” in the fourth-quarter of last year.
The central issue facing investors who want to buy software stocks is separating the AI winners from the losers. Clearly, some of these companies are going to thrive, meaning their stocks are effectively on sale after the recent rout. But it may be too early to determine who they are.
“The draconian view is that software will be the next print media or department stores, in terms of their prospects,” said Favuzza at Jefferies. “That the pendulum has swung so far to the sell-everything side suggests there will be super-attractive opportunities that come out of this. However, we’re all waiting for an acceleration, and when I look out to 2026 or 2027 numbers, it is hard to see the upside. If Microsoft is struggling, imagine how bad it could be for companies more in the path of disruption, or without its dominant position.”
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Palantir Technologies Inc. forecast revenue for fiscal 2026 that significantly exceeded Wall Street expectations, a boost for the data analytics company after its shares have gotten off to a lackluster start so far this year.
Elon Musk is combining SpaceX and xAI in a deal that values the enlarged entity at $1.25 trillion, as the world’s richest man looks to fuel his increasingly costly ambitions in artificial intelligence and space exploration.
For weeks, Oracle Corp.’s debt has been trading like junk amid concerns that its artificial intelligence investments won’t pay off for years, if at all. On Monday, those fears appeared to dim after the software giant garnered record demand for a $25 billion bond sale.
Uber Technologies Inc. is rolling out its ride hailing service in the Chinese gambling hub of Macau, expanding into a new Asian market for the first time in years.
Nintendo Co.’s profit rose a smaller-than-expected 23%, hurt by US tariffs on its flagship Switch 2 console and raising concerns about the impact of soaring memory chip prices on margins in 2026.
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Take-Two Interactive Software (TTWO US)
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—With assistance from Subrat Patnaik and David Watkins.
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