Software stocks are in a rough patch, and investors are worried. Recently, the iShares Expanded Tech-Software Sector ETF (IGV) dropped around 5%. This marks one of the biggest declines since last April and pushes the sector into bear market territory. Year-to-date, the ETF has lost about 21% of its value. This rapid shift in sentiment comes as more people question the future of traditional software companies amid the rise of artificial intelligence (AI) and automation tools.
In October 2008, IGV saw a significant drop of 23%. Today, it’s experiencing its worst month since then, losing nearly 14% so far. Analysts are feeling the pressure. Morgan Stanley’s experts referred to ServiceNow’s recent report as “good, but not good enough,” given the current investor skepticism about established software vendors.
A significant concern is whether AI will reduce demand for traditional software licenses. Investors previously valued steady subscription growth, but now they’re reevaluating this outlook. The rapid development of AI, like Anthropic’s recent model release, raises questions about how quickly these new technologies might reshape the market.
Tech giant Microsoft added to the uncertainty by reporting slower growth in its cloud services, causing its stock to tumble around 10%. The company’s less-than-encouraging forecast for the coming quarter has further fueled investor unease.
Companies like SAP are feeling the heat too. SAP’s stock plummeted around 14% after it announced weaker-than-expected growth in its cloud contract backlog. This has led analysts to label it a “disappointment.”
In response to these worries, ServiceNow’s CEO Bill McDermott emphasized that fears of AI replacing software vendors are misplaced. He argued that the true benefits of AI will come when it is fully integrated into business processes. “ServiceNow is the gateway to this shift,” he said, suggesting that the need for reliable workflow software remains crucial in an AI-driven landscape.
As companies adapt to this rapidly changing environment, the discourse around the impact of AI on traditional software firms will likely continue to evolve. For now, investors are clearly on edge, contemplating what these technological advancements mean for the future of software.
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