Key Points
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Software stocks have plunged this year, primarily because of new innovations from Anthropic.
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AI poses a real threat to software, though software stocks have continued to deliver strong growth.
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The value that’s been erased in software should appear elsewhere in the stock market.
Software stocks jumped on Monday, but the trend in the sector this year has been clear.
Year-to-date, the iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV)which tracks top software stocks like Microsoft (NASDAQ: MSFT), Palantirand Oracle, is down 26.4% for the year.
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While sky-high valuations in the sector coming into the year may be partially to blame, the biggest explanation for the collapse in software stocks is Anthropic. The AI start-up has made rapid advances in its AI models and plug-ins, designed to compete with entrenched enterprise software companies.
Many of the software-as-a-service (SaaS) sector’s worst days were triggered by product announcements from Anthropic. For example, Mythos, its latest model, is so powerful, posing serious risks to banks and cybersecurity, that the company chose not to release it to the public. CrowdStrikethe leading cybersecurity firm, fell 8% on the day it was announced.
All told, software stocks have lost trillions in market value this year. Microsoft, alone, has given up $700 billion, and Palantir and Oracle are each down about $100 billion.
Anthropic isn’t entirely to blame for the sell-off in the software sector, but it looks like the primary culprit at this point. There are two scenarios that can unfold from here, and both represent opportunities for investors.
An AI chat on a smartphone
Image source: Getty Images.
Scenario #1: The market is wrong about the AI threat
The underlying premise for the software sell-off is that AI agents and “vibecoding” platforms from Anthropic and peers like OpenAI will make software much cheaper to make and more customizable, alleviating the need for enterprises to spend tens of millions of dollars on massive per-seat contracts with the likes of Salesforce and ServiceNow.
While there is some anecdotal evidence that businesses are starting to do this, the notion that Anthropic will kill individual software companies has received substantial pushback.
Nvidia CEO Jensen Huang said in February that “markets got it wrong” on the software sell-off, arguing that agentic AI will use existing software programs, rather than disrupting them.
There’s also little evidence in these companies’ earnings reports that they are experiencing any disruption. In fact, most of them continue to post strong growth and guidance, and are incorporating AI tools into their products.
In this scenario, software stocks continue to deliver solid growth, and the market eventually gives up on the AI disruption trade, leading to a recovery. Investing in the IGV ETF or its individual components is the best way to profit in this scenario.
Scenario #2: The market is right, and that value will accrue elsewhere
Alternatively, Anthropic and other agentic AI tools could successfully disrupt the software sector, much like the internet disrupted pre-digital forms of media.
If that happens, it’s likely to take years, but the value being destroyed in the software sector should show up elsewhere. Anthropic is an obvious candidate, but the company is still privately held, making it difficult to invest directly in the company.
Another option is to invest in Anthropic’s biggest customers, as those companies are likely to benefit from the productivity and cost-savings from agentic AI.
Of the publicly traded companies using Anthropic, one of the biggest, surprisingly, is Microsoft. Though the Windows-maker is known for its partnership with OpenAI, it’s now on pace to spend around $500 million on Anthropic this year, according to The Information.
Cognizant Technology Solutions also recently became one of Anthropic’s three largest customers by seats, with plans to make Claude available for its 350,000 employees.
Additionally, Amazon and Alphabet are both major investors and partners of Anthropic, though it’s unclear how much they actually spend on Anthropic products.
Anthropic is growing rapidly, meaning its customer list is too, which should provide more potential targets for investors. The opportunity to buy shares of Anthropic could also soon be a possibility as the company is aiming to go public by the end of the year.
What’s the best move for investors
Overall, investors may want to consider hedging into both scenarios here. Investing in software stocks is the easiest and most direct option, but if Anthropic is truly disruptive enough to crush the enterprise software industry, then the companies leveraging its power should benefit.
Notably, Microsoft appears on both lists, making it a good candidate for investors. While its software business might be at risk of disruption, its cloud infrastructure division is seeing surging growth from AI, and the stock is as cheap as it’s been in years.
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Jeremy Bowman has positions in Amazon, CrowdStrike, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, CrowdStrike, Microsoft, Nvidia, Oracle, Palantir Technologies, Salesforce, and ServiceNow. The Motley Fool recommends Cognizant Technology Solutions. The Motley Fool has a disclosure policy.
