Goldman: AI will expand software market instead of 'eat' it
A lot of the talk around the current market rout that software stocks have been suffering lately is centered around the concern that artificial intelligence is going to "eat" the industry by creating tools that are cheaper and more efficient.
The downturn has been particularly pronounced for companies offering software as a service (SaaS), especially as Anthropic has recently released several AI-powered plugins that could potentially disrupt how a number of different industries use software.
The bloodbath among software companies has been so bad that its earned the nickname "SaaSpocalypse" among investors on social media.
When people talk about AI "eating" software, they are referencing Marc Andreessen’s famous declaration in 2011 that "software is eating the world" because by that point "all of the technology required to transform industries through software finally works and can be widely delivered at global scale.”
In other words, 15 years after software began "eating the world," the hunter has now become the hunted.
But a new report by Goldman Sachs Research attempts to temper the concerns that investors have about the software industry, seeing AI as something that can be incorporated into their business rather than replacing it.
Goldman Sachs US software analyst Gabriela Borges noted that "AI is software," since it is "code designed to perform tasks." So rather than eating software, Borges sees AI helping to expand the market.
However, Borges does expect competition to become much greater since AI companies are going to lower the cost of code. The main risk that Borges sees for legacy software companies is that "AI-native entrants capture the new AI opportunity while the incumbents are left with the old opportunity - namely, being the 'system of record' - that shrinks as a share of the software stack."
Borges though does not see legacy software companies becoming complacent, but rather "innovating as fast followers." She also points to a moat that incumbents have, which is "domain experience that new entrants can't quickly replicate," which could allow the incumbents to deliver better outcomes for customers.
She notes though that "they must prove they can leverage their moats to do so, which hasn't happened yet."
Rick Sherlund, founder and CEO of Sherlund Partners, compares the current market upheaval to "past transformational technology shifts that were highly disruptive but ultimately propelled the software industry onto a new growth curve."
He sees software as "being reborn around AI" that will require legacy software stacks to be re-built around large language models (LLMs) and AI agents.
Although Sherlund agrees with Borges that the incumbents have a moat through their domain experience, he is "skeptical of their long-term durability, arguing that they will buy legacy software firms time rather than guarantee their survival."
There has recently been a pushback on Wall Street at what many see as an overreaction by investors to AI's impact on the SaaS space, especially after a market rout led software companies to lose about $300 billion in market value in one day last month.
JPMorgan global investment strategist Kriti Gupta argued in a recent report that the market was using “broken logic” because it was “selling indiscriminately,” including the shares of software companies that are actually going to benefit from the growth of AI.