AI "Devouring" the Software Industry? Analyst: Market Overreacting, Buying Opportunity at Lower Prices Has Arrived

Last week, the outlook for U.S. software stocks rapidly darkened as investors increasingly believed that Claude AI, an AI assistant from startup Anthropic, would render the entire software industry and even IT departments worthless.

The software sector’s rally took a sharp turn downward, with the iShares Expanded Tech Sector Software ETF (IGV) falling 19% from January 26 to February 5. From Tuesday to Thursday last week, the Nasdaq index declined by over 1% for three consecutive days, dragged down by the software sector.

However, analysts at Morningstar Inc., a leading independent research firm, recently stated that these concerns have been exaggerated, and this chaotic sell-off actually presents an excellent opportunity to buy on dips.

“We see little evidence that the bearish logic is playing out — customer retention rates and other core software metrics remain robust. In short, we acknowledge risks, but believe the market is overly worried,” said Dan Romanoff, senior stock analyst at Morningstar.

“We do not believe enterprise software customers will shift to developing internal solutions en masse, thereby threatening the business models of existing software providers,” Romanoff added. He pointed out that the number of user accounts (purchased) might face some pressure, but there is currently no evidence that this is happening, and automation is not an emerging trend.

Last Friday, U.S. software stocks rebounded noticeably, with IGV rising over 3% and the Nasdaq index gaining more than 2%.

Due to the intense sell-off, Romanoff stated that there are still investment opportunities in the software industry. He specifically highlighted two stocks that have been heavily hit, believing they have “significant upside potential”: Microsoft and U.S. cloud software company ServiceNow.

Since the beginning of the year, Microsoft and ServiceNow have fallen 17% and 35%, respectively.

Romanoff provided a “reasonable valuation expectation” of $600 for Microsoft stock, implying a potential 50% increase; for ServiceNow, he set a valuation target of $200, with a potential upside of up to 100%.

However, he warned about the volatility in the software sector, stating that “the current market conditions in the software sector are not suitable for investors with weak risk tolerance.”

Although there are concerns that AI will “consume” the entire software industry, Romanoff believes investors have overestimated the actual impact of this new technology. He pointed out that many companies have publicly stated that they remain quite cautious about AI at present.

“Despite the hype, AI products have not generated significant revenue for software vendors, as management generally worries about AI illusions and out-of-control intelligent agents,” Romanoff said. “Data disclosed by publicly listed software companies also confirms this: AI solutions typically account for only about 2% of total revenue; additionally, OpenAI’s revenue structure further supports this, as its income heavily relies on consumer subscriptions.”

(Article source: Kechuangban Daily)