AI vs. software companies

[tede02]

Software businesses have seen their stock prices hammered. The narrative driving this is A.I. will displace them. I'm trying to understand this. I'm a user of of Microsoft Office, Salesforce, YCharts and some Intuit products for example. I've also used Factset and Morningstar. The notion that AI is going to replace all these tools is confusing. If these products went extinct, where would all my user data live? Why would AI rebuild all these existing tools from scratch? Why wouldn't the existing companies incorporate AI into their own products to compete?  

[beerbaron]

I think the AI folks are trying to sell a dream here. There are many layers of what we can call an app. I asked Gemini to give me a framework to help start the tough process. I think it can be refined by humans tough.

 

1. Structure of Data

The Question: Does the company rely on data that anyone can scrape, or do they own a proprietary, "closed-loop" dataset that AI cannot access elsewhere?

High Risk: The software processes public information or standard business documents (resumes, basic legal contracts, generic code).

Low Risk: They have 10 years of private, industry-specific telemetry or "human-in-the-loop" feedback that makes their AI significantly smarter than a general model.

2. Complexity of Workflow

The Question: Is the software a "system of record" (where data lives) or a "system of effort" (where work happens)?

High Risk: The tool's main value is saving time on a single task (e.g., "AI copywriter" or "background remover"). These are features, not companies.

Low Risk: The software is deeply integrated into a messy, multi-step business process involving multiple departments, permissions, and legacy hardware.

3. Output vs. Interface

The Question: Does the user care about the software's buttons, or just the final result?

High Risk: The UI is a complex dashboard that takes weeks to learn. An AI-native competitor could replace 50 buttons with one "chat" box or an agent that does the work in the background.

Low Risk: The interface is the value (e.g., collaborative design tools like Figma or real-time communication tools) where human-to-human interaction is the point.

4. Revenue Model (Pricing)

The Question: Do they charge "per seat"?

High Risk: If a company charges per user, and AI allows 1 person to do the work of 10, the company’s revenue will drop by 90% even if the customer is happy.

Low Risk: They use Value-Based Pricing (charging based on outcomes or usage) rather than the number of human logins.

5. Ecosystem & Integration

The Question: How hard is it to "unplug" them?

High Risk: It’s a browser extension or a standalone app with no deep integrations.

Low Risk: They are the "Single Source of Truth." If turning off the software breaks the company’s payroll, taxes, or supply chain, they are safe (for now).

Comparison: High Risk vs. Low Risk

 

 

[beerbaron]

The below is another threat to consider too. Not AI directly related... but will be a trend. Greenland was a breaking point, the decoupling will take many years but the will is now there. 

 

https://youtu.be/oZL-nRB23RI?si=cluwr16q6Hyv_lui

[gfp]

I don't think most of these software companies whose stock prices are currently falling are going to be destroyed by AI.  I think the narrative that software is abundant and cheap and the narrative around needing fewer employees - "seats" - is enough to compress their market valuations.  Then falling prices increases the volume of that narrative.  Twitter makes it more "everyone on one side of the boat!"  then "now everybody move to the other side!"  Finance twitter makes group think narrative almost immediate.

 

AI isn't going to do every person's job.  But a person who is using AI tools to their full advantage is considerably more productive than a person who did these jobs a few years ago.  The people who don't become experts at getting the most out of the AI tools evolving every week are the ones who will become obsolete in the workforce.  It will be very disruptive on many levels.  A lot of companies don't even allow their employees to use the AI tools of their choice, maybe limiting them to one MSFT tool at work - so there is no way the employee can spend hours each day learning to get the most out of AI and staying up to date on each new capability (literally every couple of days lately).

 

We need job growth to sustain out current economic model.  People are going to be so focused on not seeing mass job destruction in the near term that they might miss the complete lack of new jobs that ultimately becomes the story.  It may not be 30% mass layoffs - it may be more sneaky - the 5 million jobs that just never existed.

 

Then, later, it is going to get so ugly in the knowledge workforce that we will have real societal unrest and ultimately some form of universal basic income because elections and stuff like that.  It's sad because (some) people get meaning from their work and there are going to be a bunch of aimless Americans searching for a purpose, collecting the government dole.

 

If you have kids, make sure they are skilled users of the AI without just using it to complete their homework without learning anything.  Or encourage them do something for a living that is not anywhere near the low hanging fruit of the AI employment disruption (HVAC, Electrical, Plumbing (yuck!  not plumbing), welding, homebuilding, general contracting, ...)

[73 Reds]

22 minutes ago, gfp said:

I don't think most of these software companies whose stock prices are currently falling are going to be destroyed by AI.  I think the narrative that software is abundant and cheap and the narrative around needing fewer employees - "seats" - is enough to compress their market valuations.  Then falling prices increases the volume of that narrative.  Twitter makes it more "everyone on one side of the boat!"  then "now everybody move to the other side!"  Finance twitter makes group think narrative almost immediate.

 

AI isn't going to do every person's job.  But a person who is using AI tools to their full advantage is considerably more productive than a person who did these jobs a few years ago.  The people who don't become experts at getting the most out of the AI tools evolving every week are the ones who will become obsolete in the workforce.  It will be very disruptive on many levels.  A lot of companies don't even allow their employees to use the AI tools of their choice, maybe limiting them to one MSFT tool at work - so there is no way the employee can spend hours each day learning to get the most out of AI and staying up to date on each new capability (literally every couple of days lately).

 

We need job growth to sustain out current economic model.  People are going to be so focused on not seeing mass job destruction in the near term that they might miss the complete lack of new jobs that ultimately becomes the story.  It may not be 30% mass layoffs - it may be more sneaky - the 5 million jobs that just never existed.

 

Then, later, it is going to get so ugly in the knowledge workforce that we will have real societal unrest and ultimately some form of universal basic income because elections and stuff like that.  It's sad because (some) people get meaning from their work and there are going to be a bunch of aimless Americans searching for a purpose, collecting the government dole.

 

If you have kids, make sure they are skilled users of the AI without just using it to complete their homework without learning anything.  Or encourage them do something for a living that is not anywhere near the low hanging fruit of the AI employment disruption (HVAC, Electrical, Plumbing (yuck!  not plumbing), welding, homebuilding, general contracting, ...)

In reading about all the people AI is going to replace in various work capacities, am left with the question of when and how is AI going to generate investment outperformance for you and me?

Edited February 7 by 73 Reds
missed line

[Cod Liver Oil]

It’s just multiple compression because SaaS is no longer growth with unlimited time horizon. No one knows what g and n are now. Makes sense. My bro at Goog advised me not to step into the breach even though these things appear cheap. 

 

Edited February 8 by Cod Liver Oil

[LC]

2 hours ago, gfp said:

Or encourage them do something for a living that is not anywhere near the low hanging fruit of the AI employment disruption (HVAC, Electrical, Plumbing (yuck!  not plumbing), welding, homebuilding, general contracting, ...)

AI as the great technology for the future of humanity…so that we can all realize our dreams of becoming plumbers and welders. 
 

I agree that narrative will (and already is) cause some social unrest.

[gfp]

5 minutes ago, LC said:

AI as the great technology for the future of humanity…so that we can all realize our dreams of becoming plumbers and welders. 
 

I agree that narrative will (and already is) cause some social unrest.

 

Yeah I'm not saying I want to be a plumber or have my kid become a plumber.  But don't count on a great job at a desk.  Huge university loans might warrant a bit more thought than last generation

 

(I hate plumbing)

[Spekulatius]

 Mechanical or electrical engineering may be better than computer science, especially those that know the nuts and bolts on a practical level. Analog stuff > digital. 

[tede02]

54 minutes ago, LC said:

AI as the great technology for the future of humanity…so that we can all realize our dreams of becoming plumbers and welders. 
 

I agree that narrative will (and already is) cause some social unrest.

 

This makes me a chuckle a little because I started my career in finance in 2007 just as the GFC was starting. I've done well and it's been a pretty fun career. But I grew up in a blue collar area and was very hands-on in high school and college. Enjoyed working on cars and trucks, doing carpentry, etc. Worked some construction labor-type jobs during college summers. Very easily could have gone into one of the trades and started a business. Fair chance I would be making more money than I am now if I would have stuck with it and built a business (but I can't complain). On a similar note, my two highest earning clients are in the trades (one as a business owner and the other as a non-owner president of a mid-size contractor). It is ironic to some extent that people in white collar work generally have done well since the GFC but now they are walking on egg shells a bit while those who work in the physical world seem to have more job security. 

[73 Reds]

24 minutes ago, tede02 said:

 

This makes me a chuckle a little because I started my career in finance in 2007 just as the GFC was starting. I've done well and it's been a pretty fun career. But I grew up in a blue collar area and was very hands-on in high school and college. Enjoyed working on cars and trucks, doing carpentry, etc. Worked some construction labor-type jobs during college summers. Very easily could have gone into one of the trades and started a business. Fair chance I would be making more money than I am now if I would have stuck with it and built a business (but I can't complain). On a similar note, my two highest earning clients are in the trades (one as a business owner and the other as a non-owner president of a mid-size contractor). It is ironic to some extent that people in white collar work generally have done well since the GFC but now they are walking on egg shells a bit while those who work in the physical world seem to have more job security. 

AI will never replace - but certainly enhance - the creativity of a successful business owner.  Better efficiency should be deflationary; or at least not inflationary and lead to higher profitability for well managed businesses.  Wish I were younger; what a time to be starting out.

[LC]

1 hour ago, gfp said:

(I hate plumbing)

 

Intake: OK with me (recently had to do some minor home repairs on a water heater cold intake)

 

Wastewater? No thanks!!

 

Electric is where I get the yips. I'll pay Sparky and co to zap around. 

[Junior R]

Salesforce / Snowflake has a lot of customer Data...A corporation isn't going use AI to rebuild and then need to store the data and have only internal support when a system breaks down. Imagine system goes down you go back to AI to try and fix it but your not sure what will happen are you going risk this in a production environment where $ are being lost every second? These companies will use AI to enhance there system and cut cost.. ie. Salesforce Agent Force....This is creating a big opportunity due to fear 

 

the real problem will be is ..is there an overbuild

[Spekulatius]

I think people are getting very concerned about issues like loosing seats but is this actually a big deal? aid the software is useful, they will find other ways to get paid, presumable per usage. Seat based subscription is just a shortcut for usage anyways. Someone on X showed exploding depository’s using Claude in GitHub - how is this bearish for Gitlab for example ? If software will be cheaper and quicker to write there will be way more software. I think the market for IT budgets will increase not decline to get all those AI tools and agents into the hand of people. The  we have increased cybersecurity threats and budgets due to  exponential increases in threat vectors sand the easy to create malicious agents.

 

AImis an advanced tool and it’s a bit like we went from coding on a machine level (hardware specific Assembler ) to higher level programming languages like COBOL, Fortran, later C, then higher object oriented  languages like Java. We all knew that TAM for software increased not declined because it was cheaper to produce.

 

I sued d most SaaS vendors that deal with systems of records and tie together business processes will do fine by adding AI agents as a layer to their software either developed by the vendor or the customer in some cases. Some will fail to adopt and die but probably slower than most think.

[Masterofnone]

Just wanna put a good word in for plumbing......if for new construction. Standing on your head just to have some waste water cascade down, not so much.

Electricians make out real well because of the zap factor. Requires skill, but is actually pretty darn straight forward. But there is pricing power cause folks really don't want their house to burn down. Industrial/controls is harder but even more lucrative. 

 

I know an under-water welder who retired at age 45.

[Eng12345]

It doesn't matter if its a trade or wall street type career the ability to think independently is more important going forward than ever before. 

 

Tradesmen who can layout a new build, troubleshoot an existing install and see the cost of doing business have always been incredibly successful. 

 

Same thing with you finance boys - those of you who can think independently and prove your worth will always do better than the crowd. 

 

The cream rises to the top. Lotta ways to make it in this world. Pick one and stick to it. 

Edited February 7 by Eng12345

[MungerWunger]

On Anthropic: https://steve-yegge.medium.com/the-anthropic-hive-mind-d01f768f3d7b

 

"If you have a strictly online or SaaS software presence, with no atoms in your product whatsoever, just electrons, then you are, candidly, pretty screwed if you don’t pivot. I don’t think there are any recipes for pivoting yet; this is all new, and it’s all happening very fast."

[MungerWunger]

https://newsletter.semianalysis.com/p/claude-code-is-the-inflection-point?r=3vocpk&utm_campaign=post&utm_medium=web&triedRedirect=true

 

"Enterprise software has easily been the first casualty of the great cost decline of intelligence. SaaS itself is just crystalized information processing of workflows into code. The three moats of SaaS, switching costs of data (data is trapped), workflow lock-in (learning the UI), and integration complexity (how Slack works with Jira) have all been partially eroded at the margins. The 75% gross margin of SaaS looks like a huge opportunity, as agents migrate data between systems with lessened migration costs, Agents themselves do not rely on human oriented workflows, and MCP integrations make integration much easier. Every aspect of SaaS is cheapening, and the margins have become the first opportunity of AI.

 

A simplistic example is an agent can now query a Postgres database directly on your behalf, generate a chart, and email it to a stakeholder. That was effectively the cost of a SaaS workflow like CRM, and it doesn’t need to train humans on UI changes or update software. It just “works”. BI/analytics (agents querying databases) data entry, ITSM (L1/L2 tickets triage) and back-office reconciliation is already in the process of automation! These are knocking on some of the doors of the most sacred moats in software already.

 

In our view, anything that has a human click buttons, gather information, reformat it into another medium (email, chart, excel, presentation) is a huge risk. LLMs thrive at this kind of data interchange exclusively, effortlessly changing text into audio, English into Chinese, and words into images. And this in our view has a huge threat to one of the biggest companies in the world: Microsoft."

 

Edited February 7 by MungerWunger

[MungerWunger]

Ben Evans on AI vs. Software: 

 

 

[Junior R]

1 hour ago, MungerWunger said:

https://newsletter.semianalysis.com/p/claude-code-is-the-inflection-point?r=3vocpk&utm_campaign=post&utm_medium=web&triedRedirect=true

 

"Enterprise software has easily been the first casualty of the great cost decline of intelligence. SaaS itself is just crystalized information processing of workflows into code. The three moats of SaaS, switching costs of data (data is trapped), workflow lock-in (learning the UI), and integration complexity (how Slack works with Jira) have all been partially eroded at the margins. The 75% gross margin of SaaS looks like a huge opportunity, as agents migrate data between systems with lessened migration costs, Agents themselves do not rely on human oriented workflows, and MCP integrations make integration much easier. Every aspect of SaaS is cheapening, and the margins have become the first opportunity of AI.

 

A simplistic example is an agent can now query a Postgres database directly on your behalf, generate a chart, and email it to a stakeholder. That was effectively the cost of a SaaS workflow like CRM, and it doesn’t need to train humans on UI changes or update software. It just “works”. BI/analytics (agents querying databases) data entry, ITSM (L1/L2 tickets triage) and back-office reconciliation is already in the process of automation! These are knocking on some of the doors of the most sacred moats in software already.

 

In our view, anything that has a human click buttons, gather information, reformat it into another medium (email, chart, excel, presentation) is a huge risk. LLMs thrive at this kind of data interchange exclusively, effortlessly changing text into audio, English into Chinese, and words into images. And this in our view has a huge threat to one of the biggest companies in the world: Microsoft."

 

Agent force with Salesforce now does that ...the real question is ok now you used AI to build you own in house tool. Are you going also hire inhouse support or rely on AI...What if the agent has an issue who do you call to support a software that was created by AI...AI it self can enhance BI as now the business can directly ask in laymen's terms to create some sort of data extract vs needed the BI admin or analyst...if Salesforce as example didn't invest in AI then there business will loose customers for sure as another end product will fulfill this

 

Imagine being a big ecom business that had no vendor support to manage systems that are created inhouse by AI....this was how things where before but the code was created by internal staff...many have moved on to try and use products developed by vendors where appliable ...If we look at F5 Load Balancer ..why do companies pay premium for this when they can use NGNIX  (even though it was acquired by F5)...because they know a vendor will support the product and it can be run in production environment...yes in other open source orgs they use NGNIX / ha proxy ect...even with Palo Alto firewalls why don't companies just use pfsense  ...if anything companies that can incorporate AI will cut cost which will allow them to cut cost to end customers and deliver more superior products 

 

[Gamecock-YT]

The next 5–10 years are shrouded in uncertainty. If you enter this space as a generalist without specific expertise, you’re asking to get your face ripped off. One only has to look at the CSU threads to see it has become a total battleground stock. The fact that bulls are still buying the dips tells me we have further to fall and that we are still in the early days of this shift. Capital is fleeing the sector as hyperscaler capex continues to balloon. Following the capital cycle to its logical conclusion, the shoes yet to drop include mass layoffs, liquidations, dividend cuts, and large impairments. I’ve thrown out some stink bids on a few 'pure system of record' companies, even then discounting their renewal rates, but a lot of this goes in the 'too hard' pile. Generalists really need to figure out what their edge is, if one even exists anymore. GLTA.

[UK]

1 hour ago, Gamecock-YT said:

The next 5–10 years are shrouded in uncertainty. If you enter this space as a generalist without specific expertise, you’re asking to get your face ripped off. One only has to look at the CSU threads to see it has become a total battleground stock. The fact that bulls are still buying the dips tells me we have further to fall and that we are still in the early days of this shift. Capital is fleeing the sector as hyperscaler capex continues to balloon. Following the capital cycle to its logical conclusion, the shoes yet to drop include mass layoffs, liquidations, dividend cuts, and large impairments. I’ve thrown out some stink bids on a few 'pure system of record' companies, even then discounting their renewal rates, but a lot of this goes in the 'too hard' pile. Generalists really need to figure out what their edge is, if one even exists anymore. GLTA.

+1. Only, as much as I am terrified (and if the possible demise of the greatest business model of the last 20+ years does not scare you, then idk), I am also quite excited, especially as a 'dumb generalist':). I think all this and things we do not even think of, will create lots of opportunities for an active investor, we just need stay with our eyes open and to be as open minded as possible. 

[investmd]

I'm presuming the AI narrative is the cause for drop in price of software companies ytd? 

 

Large cap companies like Microsoft, Salesforce, Adobe, Intuit all down approximately 25% in first 5 weeks of 2026. How come this board isn't writing more about buying at these prices? Pick individual stocks or buy a basket of software stocks that have been beaten down. Is there a separate thread on topic of blood bath in software stocks? 

[investmd]

How are Nasdaq and S&P500 flat on the year when large software companies are down 25%'ish ytd? 

 

Index is not being buoyed by Mag 7 as most are either flat or down a touch. 

[MungerWunger]

1 hour ago, investmd said:

I'm presuming the AI narrative is the cause for drop in price of software companies ytd? 

 

Large cap companies like Microsoft, Salesforce, Adobe, Intuit all down approximately 25% in first 5 weeks of 2026. How come this board isn't writing more about buying at these prices? Pick individual stocks or buy a basket of software stocks that have been beaten down. Is there a separate thread on topic of blood bath in software stocks? 

Check the Constellation software thread. Most of the software vs. AI discussions are taking place there.