The software sector has taken a massive beating on Wall Street in recent months amid fears that AI is destined to take over the segment.
But the selloff turned into a collapse last week after Anthropic (ANTH.PVT) released an update to its Claude Cowork tool that included plugins to perform common tasks related to legal, marketing, finance, data and sales. OpenAI (OPAI.PVT) SO followed by its own new versionAnd Anthropic launched another one.
ServiceNow (NOW) stock is down more than 22% since Jan. 29, while Thomson Reuters (SORTING) is down more than 26% on Wednesday. Intuition (INTU) shares fell more than 26%, and Snowflake (SNOW) lost 18%. Sales force (RCMP) fell by more than 20%.
The idea is that Anthropic, OpenAI and other AI companies will create their own software to compete with offerings from existing software companies or allow companies to easily develop custom in-house software. Either this scenario could cause problems for software companies.
But some analysts say the widespread panic on Wall Street is an overreaction. And instead of replacing all existing software companies, AI will likely allow many incumbents to augment their services to better serve their customers.
But that doesn’t mean all software companies are safe.
“I think it’s overkill for a lot of the software industry,” Jason Ader, an analyst at William Blair, told Yahoo Finance. “You have a baby with the bathwater situation right now, or, you know, software indexes have just been sold, and obviously no one necessarily pays attention to who’s in the index.”
He added: “I think we need to be a little more discerning, distinguishing which software companies are more at risk versus others.”
The AI industry has made major strides since OpenAI launched ChatGPT in 2022. And while it’s certainly changed the way many of us browse the web, write emails, and catch up on meetings we’ve missed, it’s too early to crown AI companies as the new kings of enterprise software.
Yet even the suggestion of a challenge to the current order of software companies is enough to shake Wall Street. And that uncertainty helped fuel the software selloff and push investors to flee to safe havens.
“If there are more unknowns around these long-term prospects, then I think investors are going to price companies lower and certainly think about rotating into other sectors where there is more certainty, like memory and chips and data center infrastructure and power and utilities and HVAC,” explained William Blair’s Ader.
But there are several obstacles that could prevent AI companies from crushing existing software companies.
According to Morgan Stanley’s Keith Weiss, companies are unlikely to allocate their IT resources for open source AI models to write and maintain their own custom software unless this is a key differentiator in the long term.
“The key point here is that initial development cost is only part of the equation when organizations consider whether to automate business processes with their own custom coding or partner with third-party vendors,” Weiss wrote in a research note.
Sam Altman, CEO of OpenAI, demonstrates AI for business in Tokyo, Japan, February 3, 2025. (Reuters/Kim Kyung-Hoon) ·REUTERS/Reuters
“We note that open source software, with no licensing fees (essentially free development), has been available for customers to create their own applications for over two decades. Despite this, the third-party software market has thrived during this time,” Weiss added.
Ader offered a similar view, saying it didn’t make sense for a company to “code” a new customer relationship management system or payroll application using something like Claude Code.
“If you have something that works pretty well, as long as it’s not too expensive, you’ll want to focus on your core competencies,” he added.
As for whether model makers will steal market share from existing software companies, Weiss wrote that it is unlikely that large language models (LLMs) “will ever be as effective and efficient as a data warehouse or email server as existing solutions designed specifically for these capabilities.”
Instead, he explained, various AI capabilities will likely end up being integrated into existing software, expanding their capabilities and value to customers.
There’s another problem with AI companies being the new software companies: data governance.
Organizations are typically protective of their proprietary data and may not be comfortable opening up their troves of information to AI models or AI companies, rather than the companies they have worked with for years.
But none of this means that all software companies will be spared. Some may not be able to keep up with the ever-changing AI landscape and will inevitably fall behind. But those who can keep pace with AI will likely continue to do so.
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Email Daniel Howley at dhowley@yahoofinance.com. Follow him on @DanielHowley.
