AI Fears Battering Techs Stocks Due To Software Displacement Concerns

Irrational exuberance has turned into what may be irrational depression for investors who suddenly appear to believe that AI will displace corporate software contracts that have supported the industry. 

Whether these fears are real or exaggerated remains to be seen but prudent investors are certain paying to both possibilities. JL

Andrew Sorkin and colleagues report in the New York Times:

Fears that artificial intelligence will disrupt the industry appear to be growing, as investors reckon with the severity and breadth of that shake-up. Software and services companies lost about $300 billion in market value on Tuesday after the release of more A.I.-driven automation tools by Anthropic, the maker of the Claude chatbot. The worry is that these tools, which can handle some legal, marketing and customer-service tasks, could replace many current offerings. Investors in the U.S. and Europe during the past two weeks have been steadily reducing their exposure to software stocks. 

Shares in software and analytics companies are down in Asia and Europe this morning, after a battering on Wall Street on Tuesday.

Fears that artificial intelligence will disrupt the industry appear to be growing, as investors reckon with the severity and breadth of that shake-up. The latest: Software and services companies lost about $300 billion in market value on Tuesday after the release of more A.I.-driven automation tools by Anthropic, the maker of the Claude chatbot. The worry is that these tools, which can handle some legal, marketing and customer-service tasks, could replace many current offerings.

Shares in Thomson Reuters fell almost 16 percent and LegalZoom.com lost nearly 20 percent, while a JPMorgan index that tracks U.S. software stocks dropped 7 percent. The stock of Infosys, the big Indian I.T. outsourcing provider, is down 7 percent on Wednesday as well.

How much disruption is coming? A.I. start-ups like the legal services providers Harvey and Legora have already put pressure on incumbents. But the entrance of model makers like Anthropic into these businesses — allowing companies to pare down their software subscriptions while programming their own processes — represents a bigger potential threat.

Even before Anthropic introduced its latest tools, shares in companies like Salesforce, HubSpot and Atlassian had fallen by 30 percent or more over the past year. Toby Ogg, an analyst at JPMorgan Chase, wrote in a recent client note that more than 50 investors in the U.S. and Europe told him during the past two weeks that they had been steadily reducing their exposure to software stocks.

The counterargument: “There’s this notion that the tool in the software industry is in decline, and will be replaced by A.I.,” Jensen Huang, the C.E.O. of Nvidia, said at an industry conference on Tuesday. “It is the most illogical thing in the world.” Huang argued that A.I. companies won’t rebuild basic software tools from scratch, and that companies would continue to rely on existing offerings. “If you were a human or robot, artificial, general robotics, would you use tools or reinvent tools?” he said. “The answer, obviously, is to use tools.”

• Keep an eye on the latest earnings report from Alphabet, the parent company of Google, after the closing bell on Wednesday: Analysts are expected to ask about the latest usage numbers for its Gemini A.I. model and chatbot.