A year ago, Wall Street viewed software stocks as the next big winners of the AI boom. That outlook is now changing as investors worry that artificial intelligence tools could disrupt traditional software services and depress growth across the industry.
As of February 13, the software sector, tracked by the iShares Tech-Expanded Software Sector ETF (IGV), is down 22% this year, according to data from Yahoo Finance.
“I think we have one or two of these periods every year. The cause is always different, but the effect is always the same. Some of the most popular trades from the previous uptrend are just absolutely destroyed,” said Josh Brown, CEO of Ritholtz Wealth Management, CNBC reported last week.
Since the rise of generative AI, traders have wondered whether it has undermined the competitive advantages of software makers, even as they roll out AI features to boost their businesses.
Software stocks have fallen sharply so far this year, with Intuit (INTU) and ServiceNow (NOW) down more than 30%. Salesforce (CRM), Palantir (PLTR) and Adobe (ADBE) are each down more than 20%, while Microsoft (MSFT) and Oracle (ORCL) are down more than 15%.
Amazon Web Services CEO Matt Garman said investors may be exaggerating the threat artificial intelligence poses to software companies.
“My own view is that a lot of the fear is overblown,” Garman said on CNBC on February 12.
Still, Garman warned that AI will reshape the software industry.
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“There is a huge disruption,” Garman said. “AI is absolutely a disruptive force that will change the way software is consumed and how it is built.”
“The systems of record, as you call them, the SaaS providers and the big players today have an inside track to getting that business. Now they have to innovate, just like the rest of the world. They can’t stand still. If they stand still, they will be absolutely disrupted,” he added.
AWS’s revenue comes from the sale of its cloud infrastructure and platform services. Customers rent compute, storage, and software from AWS instead of building their own. Software vendors such as Adobe and Intuit are AWS customers.
On Feb. 5, Amazon (AMZN) said AWS generated $35.6 billion in revenue this quarter, up 24% year over year and marking the fastest growth in 13 quarters, according to a company statement. AWS operating income rose to $12.5 billion from $10.6 billion a year earlier.
AWS accounted for about 17% of Amazon’s total revenue, but generated about half of its total profit, supported by a 35% operating margin.
