"Zoom in: AI isn't just hitting software valuations, it's changing how these companies operate from the inside out. The big picture: As of this week, investors are seriously looking at AI not just as a productivity boost for software firms, but as a substitute. "AI is not just going to do something to labor ... it's going to do something to profits," Shelby McFaddin, portfolio manager of a $2.6 billion fund, tells Axios. One strategist likened it to BlackBerry: It survived, but its business model and valuation never recovered after being fully disrupted."
"Yes, but: Some investors are still bullish on software stocks, especially now that they come at a discount. The winners could be companies offering software toolkits, rather than single-use apps. Software incumbents will also be hard to replace: "With AI, code may become cheap, but context is expensive ... you can't LLM your way past 10 years of customer data," Pitchbook noted in a report."
Anthropic launched Claude Code and Cowork, AI tools that respectively automate code creation and enable agent-like coworker behavior, triggering a roughly 25% drop in software sector valuations over a week. Investors are now viewing AI as a substitute for some software labor and revenue rather than solely a productivity enhancer. Some incumbents may persist but with diminished valuations and altered business models. Potential winners include companies offering extensible toolkits instead of single-use apps. Key indicators of disruption will be sales growth and customer retention, which will reveal whether users switch to AI-driven alternatives over the coming year.
Read at Axios
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