It is a tough time to be a public software company.
Stocks are getting punished again today:
- PLTR -4.2%
- APP -6.2%
- INTU -5.6%
- ADBE -2.2%
- ADSK -5.5%
- WDAY -6.5%
- ZM -5.8%
- U -28% (!)
The flashpoint was Claude releasing a series of plugins. It has the market re-evaluating the moats and pricing power around software companies. The thinking is that even if companies survive their customers might need fewer licences or subscriptions to their products as the workflows are automated.
The whole model right now works on a subscription basis but what if an agent can use one subscription and send the data out to who needs it within the company? Now the software companies might be able to adapt to that with a different pricing mechanism based on data but that could be a messy transition.
Moreover, it's not clear which moats are safe. A company like Salesforce was a market darling for 15 years but posted a massive head-and-shoulders and is now breaking down.
Previously, the thinking was that the product was too complicated and too integrated for competitors to emerge. What's changed is that the market is seeing a way that a major company that already has an installed base (think Microsoft) could spin up a competitor relatively easily. Previously, it would have taken a huge team of developers years to do but with AI agents, it may be possible for a fraction of that.
For an example of what can happen, look at Zoom, which was easy enough for Microsoft to disrupt with Teams.
A similar bit of low-hanging fruit is Docusign, which is down another 6% today and 37% in the past month.
What makes these companies particularly vulnerable to a brutal correction is valuation. The previous theme was 'software eats the world' and these companies had high multiples. Salesforce tradeed at 30x forward earnings in 2024. Even with the selloff, it's still in the 15-17x forward range, which isn't exactly value territory.
So we're seeing a broad revaluation of all these business models because no one knows which ones will be disrupted. Does that bottom come here at 15x or down at 10x? That's the kind of thing that would drop CRM stock another 35% from here to around $115. Adobe is already trading at 11x.
For now, it looks like a race to the exits as not even some good earnings from some of those names can stem the tide of selling. It's not about what's happening now, it's about what the market fears in 2027 or beyond.
Here is the bottom line:
Google, Microsoft and the other hyperscalers are going to have to justify $200 billion each year in capex at some point. The market doesn't think it's going to be from selling Gemini subscriptions; it thinks the first avenue will be via disrupting software vendors and taking their markets.
