The collapse of US software stocks has triggered investors to rethink AI — has an AI-induced industry liquidation arrived?

Amid the turmoil in US stocks this week, technology stocks, especially software stocks, experienced an unprecedented collapse. Shares of leading software companies such as Salesforce, Workday, and UiPath have dropped more than 20% since customers were warned to be wary of long-term software orders.

Although most software companies don't see AI as a direct cause of slowing growth prospects, AI certainly has something to do with it.

The AI boom has two effects on software companies: on the one hand, given that AI is seen as the ultimate force for future technological development, software companies have to make every effort to avoid falling behind, which undoubtedly affects capital expenditure in other fields such as marketing; on the other hand, software company customers are also investing heavily in AI, squeezing investment in traditional software.

The software industry's attitude towards AI is also complicated.

Some supporters believe that AI can be used as a driving force to help established software companies enhance the functionality and services of their existing products and achieve rapid growth, but there are also opinions that AI may disrupt existing software companies because AI can automate many tasks and reduce dependence on traditional software, or that emerging AI companies may provide similar services at a lower cost.

However, regardless of the impact, the transformation process to AI may last for several years, and it is still too early to judge how and when companies will switch from existing enterprise software companies to new AI services. Due to concerns about the accuracy and cost of large models, many companies are currently wait-and-see investing in AI-driven services, so the impact on software spending in the short term is likely to be minimal.

Therefore, some analysts believe that the market's reaction to this fear may be too drastic.

Some investors think this has created a buying opportunity. Scott Berg, a stock analyst at Needham & Co., pointed out that Salesforce's valuation, calculated as a multiple of free cash flow, is 16 times the historical low, and historically investors are usually willing to pay 20 to 25 times.

It is worth mentioning that although some software companies have adjusted their growth forecasts for this year, the adjustments have been very small.

Salesforce lowered its full-year subscription and support revenue growth forecast from “about 10%” to “slightly less than 10%,” without changing its forecast for overall revenue growth. Workday also cut next year's subscription revenue growth guide by only about 1 percentage point from the 18% previously set.

Brad Zelnick, a software analyst at Deutsche Bank, believes that the collective sharp decline in software stocks indicates that investors are lowering their expectations about the speed and extent to which software companies will benefit from integrating AI into their products.

Others on Wall Street are more pessimistic. Tobias Francis, founder of Atlas Wealth Management, said:

AI tools have enabled a whole generation of startups to use small teams to build clones of larger companies and deliver them at 10% of the cost.

Salesforce CEO Marc Benioff supports the AI bull market theory. He said that AI models licensed by Salesforce from companies such as OpenAI will “unlock more commercial potential” by integrating different functions such as sales, marketing, and customer service.

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