It was coming; the feared disruption of artificial intelligence (AI) into the domain of software, which was already hanging around like the Sword of Damocles, came crashing down onto the markets the past week, accelerated by the introduction of Anthropic’s Claude large language model (LLM) legal tool.
Picture generated by Meta AI
Share prices of software companies such as Microsoft and Salesforce took a beating, down by 9% and 11% respectively the past 5 trading days. On the sector front using the iShares Expanded Tech-Software Sector ETF (IGV), it dropped close to 14% during the same timeframe.
Delving deeper on the situation, the number of inroads, potential or real, that AI made has been tremendous, and we are seeing a lot of these in the past few years. Though most leisure users utilise AI for generating pictures and summarizing homework, it is getting real with job-replacing tasks and applications being introduced for business purposes (e.g. Databricks, Base44, etc.). A serious threat to software, indeed.
However, if an investor steps back and relook at the whole picture, he/she may notice that there is another narrative being bandied about just recently, and that is about the threat of an AI bubble bursting. Logically the investor would be asking, “if AI eats software’s lunch, then how is it that AI is having this bubble?”. This paradox is a legitimate question.
However, amidst the bloodbath happening in the markets, a rational investor would see this as a good buying opportunity. With lowered share prices across the software and technology sector (the latter was a result of a spillover effect from the former), the next thing would be to look for companies that have strong moats and the strategic and financial ability of coming back (think Alphabet).
Think not of panicking but view it as a (probable) sale worth waiting for is now on.
Disclosure
The Bedokian is vested in Alphabet, Microsoft and Salesforce.
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