Hello, emergency services? I need to report a homicide.
In the span of mere weeks, software stocks have hemorrhaged nearly a trillion dollars in value.
The most prominent software ETF, the iShares Expanded Tech-Software Sector ETF (IGV), has plummeted an astonishing 24% since the start of the year.
Salesforce Inc. (CRM:NYSE), the trailblazer of the Software-as-a-Service (SaaS) revolution over the past decade, has witnessed a staggering 28% decline this year alone.
It's refreshing to observe the market finally acknowledging what I've been asserting for more than two years... that artificial intelligence (AI) will render numerous well-known software behemoths obsolete.
However, as I'll demonstrate, specific software enterprises possessing distinct attributes won't merely weather the AI disruption storm. They'll flourish amidst it.
And at this moment, those stocks are available at a discount.
In November 2023, during our AI Summit in NYC… I cautioned that AI would render many software business models antiquated.
I explicitly singled out Salesforce.
AI can effortlessly automate the majority of its functions, which revolve around selling customer relationship management (CRM) software.
Coding and programming once stood as an elite "sport." Constructing a customer relationship database once demanded thousands of engineers toiling for years.
Now, leveraging novel AI agent tools like Claude Code, you can craft your own iteration in a matter of days.
Claude Code, a cutting-edge tool from Anthropic, the firm behind Claude AI, can essentially replicate any human action on a computer. It's akin to endowing ChatGPT with access to your mouse, keyboard, files, and internet connection.
For the past fortnight, I've been utterly consumed by Claude Code. I've been rising at the crack of dawn to harness these tools. Observing it in action has been one of the most exhilarating experiences I've had in recent memory.
I've employed it to construct: a startup database… a personal "DOGE" bot to aid me in slashing my expenditure… and my own medical advisor that I utilized to request blood tests.
And here's the kicker: I've never written a single line of code in my life.
Software devoured the world, and now AI is devouring software. The entire software landscape is undergoing a seismic shift.
For years, numerous "SaaS" companies commanded premium prices for their offerings because crafting software necessitated an army of expensive coders.
Now, for a mere $100/month, you can access one of the world's preeminent coders (Claude Code), and "he" will labor tirelessly on your behalf.
The crucial insight for investors here is that revenue need not decline for these stocks to plummet. For the past decade, these software stocks commanded massive valuations due to their breakneck growth.
A company priced to perfection will re-rate lower even if growth decelerates. That's the phenomenon we're witnessing presently.
But not all software stocks are doomed… The selloff transpired. What's next?
You acquire the software companies that possess elements AI cannot generate or scrape.
From my perspective, there are two broad "moats" for software companies in this new AI era:
Data that is unique and private. If an AI can't obtain the data elsewhere, the value of this data skyrockets. Regulation. Hospitals won't switch to a chatbot that lacks FDA approval. The same applies to governments. With that in mind...
Allow me to introduce… the RiskHedge Software Anti-Disruption Portfolio. Here are three companies I'm confident won't be disrupted by AI:
#1: CrowdStrike Holdings Inc. (CRWD:NASDAQ)
CrowdStrike observed trillions of threat events across its network. Every new attack makes its system smarter. That data is proprietary. It doesn't live inside ChatGPT. And no serious enterprise is going to rip out a battle-tested security platform protecting billions in assets just to save a few percent on software costs.
AI makes cybersecurity more important, not less. As AI lowers the barrier to launching sophisticated attacks, the demand for advanced, data-rich defense systems increases.
#2: Palantir Technologies Inc. (PLTR:NASDAQ)
Palantir embeds inside governments and large enterprises. It ingests decades of internal operational data—data that doesn't exist anywhere else. When an intelligence agency or a major corporation builds its workflows around Palantir's systems, it becomes core to its day-to-day operations.
You don't "rip and replace" software that runs a warzone or an oilfield.
Palantir is an AI leader.
#3: Synopsys Inc. (SNPS:NASDAQ)
You can't have AI without Nvidia Corp. (NVDA:NASDAQ) chips. Nvidia can't design chips without Synopsys.
Every advanced chip, including the ones built by Nvidia, has to be designed before it's manufactured.
And chip design today is unimaginably complex. We're talking billions of transistors arranged at the nanometer scale. A tiny flaw can cost hundreds of millions of dollars.
You don't replace that with a prompt. You don't hand the blueprint of a billion-dollar chip to an experimental AI tool and hope for the best.
As AI models demand more compute, chips are getting more complex, not less.
The software bloodbath reminds me of the DeepSeek selloff last year… Last February, the Chinese startup released an AI model that was just as good as ChatGPT but cost 90% less to run. AI stocks nosedived.
That panic was a buying opportunity. So too is this one, for certain stocks.
It's time to stop treating software as a single category. It's time to start distinguishing between companies that own something genuinely scarce that is safe from AI.
I have no idea when the selling will stop. But if you're a long-term investor, it's a good time to pick up the software stocks that will thrive in the AI age.
In my free Jolt investing letter, I write about tech disruptions and how to invest in them. AI is the mother of all disruptions and it’s a big theme for us and will continue to be. You can join us here.
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- Stephen McBride: I, or members of my immediate household or family, own securities of: None. My company has a financial relationship with: None. My company has purchased stocks mentioned in this article for my management clients: None. I determined which companies would be included in this article based on my research and understanding of the sector.
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