AI Shock in Software Stocks: Is the Stock Market Overreacting?

Massive price losses in companies like Adobe and SAP are fueling doubts about the software industry. However, evidence suggests that AI might be a growth driver rather than a killer technology.

For investors seeking dynamic growth, the software sector has been a prime destination. For years, it was hailed as the primary beneficiary of trends like the internet, digitalization, cloud computing, and "Software as a Service." Phenomenal long-term stock performance, often exceeding a thousand percent, was common, with companies like Cloudflare, Appfolio, and Cadence Design Systems leading the way. Even giants like Microsoft and Palo Alto Networks saw their stock values multiply.

It's notable that many of these prominent names are American companies. Indeed, the software industry is predominantly a U.S. domain, with SAP being what Bill Gates once referred to as an "operational accident." It's worth remembering that Microsoft had intended to acquire SAP many years ago.

However, the advent of Artificial Intelligence has sparked concerns on the stock market: could the disruptive software industry itself be disrupted or rendered obsolete by AI? Sharp stock price drops, even among major software companies, seem to support this notion. Adobe's shares, for instance, have lost over half their value in the past 24 months.

These price declines are not confined to the American market and disproportionately affect traditional IT service providers. Looking at German-listed stocks, weak performance is evident in SAP, Atoss Software, Teamviewer, GFT Technologies, Adesso, Mensch und Maschine, Nemetschek, All for One, and others.

Meanwhile, declining stock prices have led to more attractive valuations within the sector. Investors will face a fundamental decision: does AI threaten the existence of these companies? Naturally, each case is unique. However, several indicators suggest that the stock market, as in other instances, may be prone to overreaction. After all, AI itself is software, and its expected widespread implementation across most economic sectors will generate immense demand. In this light, it might represent a transformation rather than outright disruption. Software and IT companies that successfully integrate and implement AI could emerge as future market winners.

Furthermore, the current fear of disruption is compounded by recent geopolitical events. This adds further downward pressure on an already struggling industry. Therefore, the stock market adage of "buy when the cannons are thundering" might prove relevant here as well.