Until recently, the discourse around AI was that $600 billion in annual corporate capital expenditure (“capex”) fuels it has been beneficial for stocks in the short term. The companies that receive this money in the form of new revenue (the makers of AI models, the builders of data centers, and the energy companies that supply them) would be the immediate beneficiaries. The efficiency gains brought by AI would benefit both technology and non-technology companies. Big Tech hyperscalers have consistently argued that demand from their revenue-paying customers far exceeds their ability to provide AI services.
This narrative was turned on its head over the past 24 hours as traders realized that AI also has the ability to reduce revenues from a wide range of adjacent technology companies.
The argument made by Palantir CEO Alex Karp and CTO Shyam Sankar on their recent earnings call– is that AI is now so good at writing or managing enterprise software that it threatens to render irrelevant a range of technology companies that for years have enjoyed recurring revenue by providing enterprise applications to businesses on a software-as-a-service (SaaS) basis.
This led to a widespread sell-off in tech stocks, wipe out $300 billion in market capitalization in a single session.
S&P 500 futures were flat this morning after closing down 0.84% last night.
SaaS companies have taken a beating: Microsoft closed down 2.87%; SAP is down 3.29% this morning on the German market; Sales force lost 6.85% yesterday and fell further in overnight trading; ServiceNow was down 6.97% yesterday and was also down slightly overnight.
Palantir’s Sankar said on the call that his company’s “AI Forward Deployed Engineer” product, which allows customers to manage software and code bases through natural language commands, is capable of reducing the time needed to complete “complex SAP ERP migrations” from “years of work” to “as little as two weeks.” (ERP stands for “integrated management software package” and refers to a service offered by SAP to help businesses transition from aging legacy systems to new ones.)
Karp added: “In the US market, we have inbound requests from customers where people have already seen evidence from other companies and not just one use case. (There are) a myriad of use cases.”
Jefferies analysts Akshat Agarwal and Ayush Bansal, who focus on Indian technology companies, released a note this morning arguing that AI has the ability to dent revenues at a wide range of technology companies:
“Anthropic’s Cowork plugins and Palantir’s claims of faster SAP migrations highlight how AI could potentially erode application services revenue for IT companies. With application services accounting for 40-70% of revenue (for technology companies in India), IT companies are facing growth pressures. Consensus growth estimates do not fully reflect this, posing a risk of falling valuations,” they said. warned. Claude Cowork is like a general work assistant which can organize tasks and files autonomously.
“Software stocks have seen a correction following this situation, but we believe the impact of this situation could extend well beyond software, potentially disrupting downstream application managed services (AMS) revenues for IT services companies.
“Our checks suggest that the use of AI clearly reduces migration times, which in turn can reduce application implementation revenue for IT services companies,” they added. “AI will weigh on revenue growth for IT companies over the next two years.”
Ed Yardeni of Yardeni Research made a similar argument in a note to clients: “Software stocks were particularly hard hit because Anthropic rolled out new tools for its Cowork product. It’s too early to tell how useful the new tools will be, but investors have moved to reduce software stock valuation multiples.”
SAP refuted Karp’s view. “AI agents will massively push the performance limits of SaaS solutions, but will not replace them,” the company said. Fortune. A spokesperson argued that SaaS providers will be the biggest beneficiaries of AI because they have the data, processes and semantics that AI agents need to function.
“Businesses always need a trusted source of truth to run their businesses. AI agents need clear, structured data and proven processes to produce reliable results,” the spokesperson said.
Here’s a look at the markets before the open in New York this morning:
- S&P500 Futures were flat this morning. The last session closed down 0.84%.
- THE STOXX Europe 600 was down 0.18% at the start of the session.
- THE FTSE 100 in the UK was up 0.83% at the start of the session.
- Nikkei 225 in Japan was down 0.78%
- The Chinese CSI 300 was up 0.83%.
- THE South KoreaKOSPI was up 1.57%.
- India’s Nifty 50 was flat.
- Bitcoin decreased to $76,000.