The ongoing selloff in software stocks, fueled by anxieties surrounding the disruptive potential of artificial intelligence, is far from its conclusion. David Sambur, co-head of private equity at Apollo Global Management, articulated this sentiment during a recent appearance on CNBC, stating that the market is still in the nascent stages of this technological reckoning.
While some analysts on Wall Street have found solace in the recent, albeit modest, rebound of the IGV Software ETF—which has seen a 3% uptick in March despite a significant 20% decline year-to-date—Sambur suggests these gains may be premature. He emphasized that software companies are currently navigating a period of intense scrutiny, with fundamental questions arising about their core revenue models, gross margin profiles, and the sustainability of their valuations. This heightened scrutiny is compounded by the rapid advancements and competitive pressures emanating from AI powerhouses like Anthropic and OpenAI.
“I know the markets are moving up and they’ve rebounded a little bit, but I don’t see any of those four things changing because of the real question mark about what the impact [is] of AI lowering the cost to compete, and therefore increasing the level of competition,” Sambur explained.
Sambur, who joined Apollo in 2004, underscored the unprecedented speed of this AI-driven disruption, describing it as “faster than I’ve ever seen at any point in my career.” The inherent challenge, he noted, lies in the industry’s struggle to forecast the long-term evolution of software business models over the next one to five years, given the ceaseless and rapid pace of technological innovation. “No one knows,” he admitted.
Consequently, companies are compelled to recalibrate their valuations, incorporating a larger margin of safety to account for these substantial, unfolding uncertainties. This cautious approach is reflected in the conservative outlooks that most software companies are presenting for the current year.
Amidst this evolving landscape, Sambur also pointed to emerging investment opportunities within the software sector, particularly in strategic deals and share buyback programs. A growing number of software firms, including industry giants like Intuit, Hubspot, and Salesforce, have recently announced their intentions to repurchase shares.
However, as RBC Capital analyst Rishi Jaluria observed in a client note, these buyback announcements are often overshadowed by the pervasive AI concerns. The prevailing debate on Wall Street, Jaluria suggested, is whether these share repurchases represent a bullish signal or a sign of capitulation. He further posited that significant buybacks could potentially stifle future mergers and acquisitions, thereby limiting avenues for innovation. “If companies are funding buybacks with major cash balances on hand, that’s one thing, but huge buybacks mean less capital for future M&A, especially if raising debt,” Jaluria cautioned.
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