An asset manager with a strong track record has raised concerns that the rapid advancement of artificial intelligence might lead to the collapse of many software companies, as AI could potentially automate a significant portion of their services.
Nick Evans, who manages the $12 billion global technology fund at Polar Capital, has outperformed 99% of his peers over the past year and 97% over five years by selling off software stocks early. This information comes from a report by Bloomberg.
Evans expressed to Bloomberg, “We believe that application software faces an existential threat from AI.”
As a result of fears that AI—especially applications like Anthropic’s Claude Cowork—will automate tasks like document and payroll management, software stocks have experienced notable declines.
Exchange-traded funds (ETFs) that track the U.S. software sector are down more than 22% since January. Major players like Salesforce and ServiceNow have seen their stocks drop by 25% and 27%, respectively.
Evans mentioned that Polar Capital has nearly divested itself from companies such as SAP SE, ServiceNow, Adobe, and HubSpot, stating that the fund “will not be returning to these companies.”
According to Evans, investors “need to be significantly underweight application software, and they need to act quickly as disruption is accelerating as models improve.”
He also noted that a market crash could negatively impact software firms in the long-term because many employees rely on stock as part of their compensation, which might force executives to inject more cash to offset stock losses.
Evans commented, “We do not believe the current price reflects the uncertainty of the terminal value or the pressure on free cash flow.”
There’s fierce competition in the software sector, coming not just from AI leaders but also from customers who are racing to create their own AI tools to cut costs.
He suggested that the upcoming financial year might be particularly challenging, predicting that only a handful of companies will survive, similar to the disruptions seen in print media during the internet boom of the 2000s.
However, he pointed out that firms like SAP, known for their complex software solutions, might be better positioned to withstand market changes.
Evans remarked that AI tools are becoming “dramatically more powerful,” making the long-term prospects of even specialized software firms uncertain.
Interestingly, strong hedge funds are showing confidence in semiconductor manufacturers, as seven of the top ten companies were in this sector at the end of January. Notably, Nvidia, led by Jensen Huang, constitutes nearly 10% of their total portfolio.
The fund is optimistic about companies producing networking equipment and fiber optics, as well as those providing essential energy infrastructure for data centers.
In January, Evans increased his stakes in infrastructure software companies like Cloudflare and Snowflake, maintaining a neutral stance on cybersecurity software, which he doesn’t believe is facing immediate threats from AI advancements.
The conversation around the future of the software sector in relation to artificial intelligence continues on Wall Street.
Meanwhile, strategists at JPMorgan Chase & Co. offered a more positive outlook last week, suggesting that software stocks, including Microsoft and ServiceNow, might recover after the recent volatility in prices.
