The Current State of Software Stocks: A Year of Reckoning
In 2023, software stocks have faced significant declines as concerns over potential disruptions from artificial intelligence (AI) challenge previously secure business models. This downturn has impacted a wide range of firms, including industry giants like Salesforce (CRM) and mid-tier players such as DocuSign (DOCU). Despite these large sell-offs, RBC Capital Markets strategist Lori Calvasina suggests that the decline may not have reached its peak.
Wall Street’s Earnings Outlook
Calvasina posits that analysts on Wall Street have been slow to downgrade their earnings projections for software companies, indicating there could be further declines in stock prices. "Software revisions have stabilised around the 50% mark, but haven’t yet entered negative revisions territory," she stated. This situation raises concerns that more drastic adjustments to earnings expectations might be forthcoming, which could further depress valuations across the sector.
While current valuations for software firms are approaching historical lows, Calvasina underscores a striking disparity: software earnings per share (EPS) revisions still appear stable, not meeting the extreme negative revisions typically seen prior to a sector washout.
Navigating the Software Landscape
The software market is undergoing a severe valuation correction as investors recalibrate their expectations of AI’s role, shifting from seeing it as a beneficial boost to recognising its disruptive potential. This downturn, often referred to as a "SaaSpocalypse," has crystallised around three significant concerns:
- Democratisation of Development: AI technology enables companies to create bespoke tools internally, potentially reducing dependence on traditional software solutions.
- Seat Compression: Automated AI agents are replacing human roles, decreasing the need for multiple user licenses typically sold by software companies.
- Growth Lag: Many software providers are finding it difficult to monetise AI innovations, while hardware firms like Nvidia (NVDA) are benefiting substantially.
Notably, ServiceNow (NOW) has experienced a staggering decline of 44.6% this year, while Salesforce has also seen over a 40% drop from its peak, attributed to concerns about its reliance on a seat-based licensing model. Furthermore, Adobe (ADBE) shares fell nearly 20% following the announcement of CEO Shantanu Narayen’s departure amid fears that generative AI could undercut its dominance in creative software.
The Road Ahead for ServiceNow
In a recent earnings report, ServiceNow executives attempted to reassure investors about the company’s performance and its strategic significance in the AI landscape. However, the stock suffered a sharp decline of 52% in the last year. Citi analyst Tyler Radke remarked that ServiceNow’s mixed results for 2026 reflected weak organic growth, a lack of clarity in earnings revisions, and issues relating to recent acquisitions, compounded by slower deal-making activity in the Middle East.
Conclusion: The Software Sector’s Future
The software industry’s turbulence reflects broader concerns about AI’s transformative impact on business operations and revenue models. Analysts remain cautious, awaiting more significant signs of adjustment in earnings expectations. As valuation challenges continue to unfold, the sector’s ability to adapt and innovate within this shifting landscape will be critical for its recovery and long-term sustainability.
