WSJ: Threat of New AI Tools Wipes $300 Billion Off Software

Threat of New AI Tools Wipes $300 Billion Off Software and Data Stocks

From Legalzoom.com and Expedia to Ares and Apollo, shares of companies that sell or invest in software fell sharply on Tuesday
 

 

Private-equity managers such as Blue Owl Capital have bet big on software companies in recent years. BING GUAN/BLOOMBERG NEWS

Investors’ fears that new developments in artificial intelligence will supplant software reverberated through the stock market Tuesday, dragging down the shares of companies that develop, license and even invest in code and systems. 

Traders have questioned whether AI will chip away at the competitive moat built by software makers like AdobeADBE -7.31%decrease; red down pointing triangle and Salesforce CRM -6.85%decrease; red down pointing triangle ever since generative AI models hit the market several years ago. Recent advancements in tools such as those from AI developer Anthropic are now prompting more scrutiny.

On Tuesday morning, investors homed in on Anthropic’s announcement that it was adding new legal tools to its Cowork assistant meant to help automate a number of legal drafting and research tasks. Shares of Thomson Reuters TRI -15.83%decrease; red down pointing triangle, Legalzoom.com LZ -19.68%decrease; red down pointing triangle, and London Stock Exchange LSEG -12.80%decrease; red down pointing triangle, which all provide some form of legal tools or research databases, all fell more than 12%. 

By afternoon trading, the downturn had swept through the broader software market. PayPal PYPL -20.31%decrease; red down pointing triangle, Expedia Group EXPE -15.26%decrease; red down pointing triangle, EPAM SystemsEPAM -12.87%decrease; red down pointing triangle, Equifax EFX -12.11%decrease; red down pointing triangle and IntuitINTU -10.89%decrease; red down pointing triangle were among the hardest hit, all dropping more than 10%. A pair of S&P indexes that track software, financial-data and exchange stocks lost a combined total of around $300 billion in market value.

“If things are advancing as rapidly as we hear from OpenAI and Anthropic, it’s going to be a problem. Investors are starting to go after any of the companies that could be disrupted, which is all kinds of software application names,” said Art Hogan, chief market strategist at B. Riley Wealth Management.
 

The tech-heavy Nasdaq composite fell 1.4%. The S&P 500 was 0.8% lower, while the Dow Jones Industrial Average, which is less exposed to software, shed around 167 points, or 0.3%. The selling Tuesday wasn’t particularly widespread—five of the S&P 500’s 11 sectors closed higher.

For weeks, Silicon Valley insiders and software engineers raved about the capabilities of Anthropic’s AI model, Claude, and especially its ability to take over desktops and complete coding projects relatively autonomously.

While other AI models and tools have similar capabilities, millions of people are now discovering and using them to write software, do data analysis and complete other tasks. Software companies are defending their businesses, noting that writing code is often the easiest part of building a platform based on trust and the individual data and information. But investor jitters have persisted.

Even before Tuesday’s drop, software and service was S&P Dow Jones Indices’ worst performing subsector this year.

Private-funds firms, which invested heavily in software equity and debt in recent years, also suffered in the selloff. Shares of Ares Management ARES -10.15%decrease; red down pointing triangle, KKRKKR -9.69%decrease; red down pointing triangle and Blue Owl Capital OWL -9.76%decrease; red down pointing triangledropped more than 9%, while Apollo Global ManagementAPO -4.76%decrease; red down pointing triangle and Blackstone BX -5.24%decrease; red down pointing triangle lost more than 4.5%.

Private-equity managers snapped up software companies over the past decade, often borrowing money from private-debt funds to pay for the buyouts. The flurry of deals left software as a significant slice of their investment portfolios. 

Software was supposed to “eat the world,” as tech investor Marc Andreessen once predicted. And, until recently, the industry’s growth made for profitable investments. Now, with the industry under pressure from AI, some of those software holdings have drawn scrutiny.

“I don’t view this as a private credit or liquidity issue,” Jon Gray, Blackstone’s president and chief operating officer, said at WSJ Invest Live on Tuesday. “It’s the change happening in the economy. You could be an incumbent software company that’s the system of record and maybe you face risk from AI disrupters.” 

Gray said the private-credit industry is healthy despite issues with a handful of specific investments in recent months. But investing in the software sector now comes with “disruption risk,” thanks to the accelerating pace of change brought by AI and other advancements. 

Software now accounts for about 20% of investments in business development companies, or BDCs, a booming type of private-credit fund. That compares to around 10% in 2016, according to research by Barclays.

Blue Owl, in particular, became an evangelist for “recurring-revenue” lending. The firm and others bet that corporate clients would be unlikely to end “sticky” software contracts because of the difficulties involved with changing technology systems.

Beyond software, the tech and AI trade has been broadly under pressure since Microsoft reported higher-than-expected spending on AI infrastructure and slower-than-expected cloud growth last week. Investors have grown skeptical that the high costs of building out AI systems will eventually translate into corporate profits. 

“The enthusiasm for AI rolls through peaks and valleys,” said Louis Navellier, founder of Navellier & Associates.