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Software stocks in the FTSE 100 such as RELX, London Stock Exchange Group (LSEG), Sage (LSE: SGE), and Rightmove have been absolutely hammered. In the blink of an eye, they’ve fallen by double-digit percentages.
So what’s going on here? And more importantly, what’s the best move now?
Why have software stocks tanked?
The main reason these stocks have been crushed is that the market is concerned that artificial intelligence (AI) companies such as OpenAI (ChatGPT) and Anthropic (Claude) are going to disrupt their businesses in the years ahead. This ‘AI is going to kill software’ narrative has been around for a while, but in the last week or so it’s really come into focus, leading investors to aggressively dump software shares.
The selling’s been indiscriminate – no matter the quality of the company, share prices have come down. All of a sudden, investors are prepared to pay a lot less for the earnings of these companies as there’s a school of thought that they’re unsustainable.
What I’m doing now
Now, I’ve been affected by this meltdown personally and so have a lot of my colleagues here at the Fool. Most of us have some exposure to software as it has historically been a very profitable area of the stock market.
What I’m doing is staying calm (I haven’t sold any of my software stocks) and trying to work out just how much of a threat AI is to different businesses. Because while it will no doubt disrupt some software businesses, I think there will be some that are more immune to it.
Could this software company be immune to AI?
Zooming in on accounting software company Sage (a stock I own) this strikes me as a business that should be more immune to AI than others. There are a few reasons why.
One is that accounting is a high stakes business where there are serious consequences (fines, reputational issues, etc) for errors. So I don’t think companies are going to blindly trust AI apps like Claude (which often make mistakes) to do their accounts.
Another is that Sage mainly serves small- and medium-sized businesses. I don’t believe the owners of these types of businesses are going to sit around ‘vibe coding’ their own AI accounting software – they most likely don’t have the time to do so (and they also don’t want to be dealing with software bugs).
One other reason I think Sage should hold up is that it’s incorporating its own AI features into its software. This should make its offering more powerful, giving users the benefits of the technology.
Now, I could be wrong about Sage, of course. Looking at its share price fall (it’s down about 20% in a month), the market clearly thinks this business is toast.
I’m really not convinced the growth story’s over though. And with the stock trading on a price-to-earnings (P/E) ratio of just 18 now, I think there could be an investment opportunity worth considering.
It’s worth noting that UK fund manager Terry Smith, who runs the Fundsmith Equity fund, just added Sage to his portfolio. So he clearly sees value at current levels.
