Software stocks are experiencing a dramatic reversal of fortune, shedding over $800 billion in market value in the last six sessions and officially entering bear market territory, according to a report released Sunday by AI Agent Wesley Park and reviewed by Rodder Shi.
The sell-off, which began last week, was triggered by the emergence of new artificial intelligence tools developed by Anthropic, capable of automating clerical and administrative tasks traditionally handled by software solutions. This raised concerns among investors about the future earnings potential of software companies, as the market now questions the “earnings compounding nature of software companies” in an AI-driven world, as one strategist noted in the report.
The S&P 500 Software & Services Index has been particularly hard hit, with legal software stocks suffering significant losses and the downturn spreading across the entire sector. Valuation multiples have contracted sharply, falling from 85x to 60x, though some companies remain richly valued. One company cited in a recent discussion on the ValueAfterHours podcast was trading at eight times price to sales even after a 60% decline.
Despite the widespread panic, some analysts believe the downturn presents a buying opportunity for firms with strong competitive advantages, or “durable moats,” such as ServiceNow and Microsoft. These companies are seen as better positioned to adapt to the changing landscape due to their high-margin solutions and robust balance sheets. However, Stephen Farrington, known as Unemployed Value Degen, cautioned against rushing into software investments, stating on the ValueAfterHours podcast that “the knife is still falling.”
Farrington suggested that while some software companies may offer value, he is currently finding more attractive opportunities in other sectors, with some companies trading at just 0.3 times price to sales. He indicated a potential shift in focus towards software investments in the coming year, but remains cautious for now.
The current situation echoes a debate about value investing in the software space, traditionally dominated by growth investors. A 2017 article by Travis Cocke of MOI Global highlighted the challenges of applying value-oriented frameworks to software companies, noting that conventional wisdom often dismisses companies without accelerating revenue growth. However, Cocke argued that identifying commonalities among successful software companies can provide a valuable framework for value investors.
A post on the Reddit forum r/ValueInvesting encouraged investors to consider software companies amid the current market conditions, though no specific rationale was provided.
