The market is signaling that every software company is at risk—a dramatic change for an industry that has enjoyed positive sentiment for years. Investors have lost conviction in the durability of economic characteristics that historically defined high-quality software businesses, making it nearly impossible to forecast the terminal value of software shares.
The Bear Case: Disruption Could Hit Profit Pools
Profitability concerns are hard to disprove. If AI agents can autonomously execute complex workflows, customers may no longer need full software applications. As a result, traditional user interfaces would lose relevance while switching costs fall and pricing power erodes. More broadly, if AI lowers barriers to entry across large portions of the software ecosystem, supply will rise faster than demand. Increased competition would pressure pricing, margins and returns on capital for incumbents—especially those relying on seat based or feature-driven pricing models.
These risks cannot be dismissed. That said, truly autonomous agents capable of managing complex, regulated, enterprise scale workflows remain limited today to areas like coding assistance and customer service. So the long term trajectory is uncertain, and the timing of economic impact remains unclear.
Not All Firms Face the Same Risks
Disruptive impacts won’t be distributed equally across the broad software industry, in our view. Companies providing horizontal application layers—such as customer relations management or workflow automation—are very different to vertical providers of banking systems or retail sales systems, to name a few. Business dynamics differ for infrastructure and cybersecurity firms.
So the key question is: How easy or hard is it to replace certain types of software? Systems of record, for example, aren’t easily displaced because these mission-critical platforms are deeply embedded in organizations with authoritative data sets and compliance frameworks. In contrast, interface apps with low switching costs and limited proprietary data are much easier to replace.
Is the Bear Narrative Running Ahead of Financial Reality?
Nobody really knows where value will accrue across the AI stack (applications, agents, data or infrastructure). This explains why the market has pushed up the discount rate applied to software stocks across the board, which has dragged down valuations (Display). Share prices have fallen despite little sign of operational stress in customer behavior, retention metrics or reported financials.
