Investors Abandon Software Stocks Despite Earnings Reports
Amid growing concerns about the impact of artificial intelligence (AI) on software companies, investors are increasingly moving away from software stocks. This trend comes despite a series of upcoming earnings reports from major industry players.
Upcoming Software Earnings Reports
Several high-profile software firms are scheduled to announce their earnings this week, including:
- Workday Inc.
- Salesforce Inc.
- Intuit Inc.
- Autodesk Inc.
- Snowflake Inc.
However, investor sentiment remains negative, largely due to fears surrounding AI’s potential disruption of growth in the sector.
Investor Sentiment and Market Performance
The software and services sector has seen a notable decline, as illustrated by a report from Citrini Research that highlighted AI-related risks. For example, on one trading day, the iShares Expanded Tech-Software Sector exchange-traded fund, known by the ticker IGV, dropped by 4.8% and has fallen 27% year-to-date, signifying its worst quarter since 2008. Comparatively, the S&P 500 index remains nearly unchanged this year.
Impact of AI Tools
AI advancements, particularly from companies like Anthropic and OpenAI, have raised concerns that new tools may diminish demand for established software products. Anthropic recently revealed AI tools designed to automate various fields, raising caution among software companies.
Performance Data and Earnings Expectations
Despite negative sentiment, some data indicates a divide between market performance and actual company earnings. Of the 15 software firms in the S&P 500 that have reported their results this season, 87% exceeded profit expectations, while 67% surpassed revenue forecasts. In contrast, approximately 75% of all S&P 500 companies exceeded their earning estimates.
Valuation Metrics and Future Outlook
Bank of America analysts noted that the software sector is now viewed as “the new value sector,” with software firms trading at historically low multiples. The S&P 500 software and services index currently trades at less than 21 times forward earnings, significantly lower than its five-year average of 29 times.
Salesforce’s shares, for example, are priced at approximately 13 times estimated earnings, making it one of the cheapest stocks in the sector. Analysts predict Salesforce will report about 12% growth in revenue but project a net earnings decline of 15%.
The Uncertainty Ahead
The potential long-term effects of AI on the software industry remain uncertain. This unpredictability complicates financial forecasting and raises concerns about sustained growth. As a result, Wall Street remains skeptical, especially for companies that have not performed well historically, like Salesforce, which has seen its stock drop 24% over five years.
Analysts suggest that while positive earnings may offer temporary relief, the ongoing threat of AI disruption looms large, and it remains unclear how many companies will survive this shift.
