John Towfighi, CNN
(CNN) – High-tech companies offer world artificial intelligence, but ironically, the technology sector itself is one of the people who are currently suffering the most from AI.
The rise of AI tools that can be written and developed by writing code is clouding the outlook for the software industry, investors say they will send stocks in those companies slump.
Software as a service, or “SaaS,” is a microcosm of how AI supports the way many companies operate, as it is a bread and butter business model where AI is at risk of confusion due to AI.
Shares in software giant Salesforce (CRM) have fallen 26% this year, making it the Dow's second-best performance.
Meanwhile, Adobe (Adbe) stocks have fallen 19% this year. Stocks of Atlassian (Team), which owns applications such as Trello, have fallen 30% at the same time.
In comparison, the Benchmark S&P 500 has risen 10% this year, while the high-tech NASDAQ composites have risen 11%.
“The software evaluation is likely under pressure from the 'AI death' narrative, and in the short term it is likely to promote continuous volatility,” said Matthew Hedberg, software research analyst at RBC Capital Markets, in a memo on August 12.
A difficult time for software companies
According to Ted Mortonson, technology strategist at Baird, the market is taking into account a paradigm shift in software and technology.
While AI models continue to write and improve code, the software business, which has been a high-tech Darlings for the past few years, is at risk of decline with investors.
The traditional SaaS business model involves renting software to customers. But the rise of AI tools that can work without “agent AI” or supervision has opened the door for businesses to cut their rental models, Mortonson said.
Agent models can write and develop code encapsulated by the term “vibe coding.” If that helps companies develop their own software, it could threaten the number of seats or subscriptions of established software companies.
“The volatility of this technology is not something I've seen in my career to pivot to an agent, and it's happening very quickly,” Mortonson said. “Your seats are under pressure. This is Saas' death kiss.”
Companies may have expected this change, but they probably didn't think it had happened that quickly, analysts say.
“Software is currently under great pressure as AI eats lunch,” said Dan Ives, global technical research director at Wedbush Securities. “Adobe and Salesforce have miscalculated, among other things, how quickly the AI revolution is digging into market share.”
Salesforce did not respond to requests for comment. Adobe and Atlassian declined to comment.
Does AI eat software?
Venture capitalist and technology investor Mark Andreesen famously wrote in 2011 that “software eats the world.”
Nvidia CEO Jensen Huang said in 2017 that “software eats the world, but AI eats software.”
Ben Reitzes, head of high-tech research at investment firm Melius Research, said in the memo he believes Huang's views are true.
“The world is approaching the reality of the theme of “AI eating software,” Reitzes said.
“AI reveals that it can create really great applications, from healthy startups to most people big clouds (like Google).
Openai CEO Sam Altman, one of AI's biggest cheerleaders, was posted on social media earlier this month.
Software companies are also facing competition from the big tech giants. Companies such as Microsoft (MSFT) and Oracle (ORCL) are expanding their AI capabilities.
“AI is driving fundamental change in the BIZ app market as customers move from legacy systems to agent business applications,” Microsoft CEO Satya Nadella said in a company's revenue call in July.
“In many ways, AI has disrupted this traditional software subscriber-based model,” says Angelo Zino, technical analyst at CFRA Research.
However, Zino said it is not very certain whether AI will replace the software.
“There's definitely concern there,” Gino said. “The best way to put it down is that the ju umpire is still out in many ways.”
There are some questions about the value of AI and whether it will offer a meaningful shift from legacy companies like Adobe, which have built a long-standing subscriber base.
“There is a threat to this model, but there are still opportunities for these companies to thrive and adapt in this changing environment,” Zino says. For example, Salesforce has its own AI agent tool called “AgentForce.”
In a slump
Wall Street is unclear whether AI can really replace SaaS. However, the software company's shares have slipped this year as investors tried to ease portfolio losses.
“For now, they're missing the train,” Ives said. “We believe the software will rebound and will find a way out of this in order to monetize and participate in the AI party.”
Jefferies equity analyst Brent Thill said in a memo that he believes the fear of software AI is exaggerated.
“AI is a transformational wave, not a disruptive hurricane for software,” he said.
Thill said he recently met with a Salesforce partner, but said he's seen a headwind because of AI but thinks he'll end up rebounding.
“Partners agree that the fear of AI as an alternative to software is exaggerated, and many highlight the shortcomings of atmospheric coding,” he said.
The market impact of AI could change rapidly, said Ross Mayfield, investment strategist at Baird. It was only seven months ago that Chinese startup DeepSiek caused calculations in Silicon Valley. But that didn't last.
“The macros could change, and the AI photos could change,” Mayfield said. “There are so many things that can move right away.”
“If you think you know that the AI landscape will be visible in 12 months now, there are a lot of assumptions that you should probably try because of how fast this is moving,” Mayfield said.
CNN Wire
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