Dan Ives says the software selloff is a ‘generational opportunity’ to invest

The AI growth story has been tempered by a widespread selloff in software stocks. Call it the software-mageddon or the SaaSpocalypse, but companies who specialize in designing, selling, and maintaining digital software products are getting battered. Earlier this month, JPMorgan analysts wrote that software companies had lost around $2 trillion in value over the past year, calling it “the largest non-recessionary 12-month drawdown in over 30 years.” 

The culprit has been an increasingly widespread feeling among investors that AI is sorting tech players into winners and losers. Under this view, software companies could fall into the latter camp as the capabilities of newer AI models promise to replace expensive digital services, rendering the business models of companies like Salesforce and Atlassian obsolete.

But not all investors are convinced these companies are destined for irrelevance. Hidden within the chaos could lie an undervalued chance to buy these tech stocks at a discount, a relative rarity in an age of soaring valuations and speculative growth. It all depends on whether bullish buyers consider AI as complementary to existing software services, or capable enough to replace them entirely.

“I think this software selloff will go down as a generational opportunity to own some of the stalwarts,” Dan Ives, a managing director and senior equity research analyst at Wedbush Securities, said in a Yahoo Finance interview Friday. “I feel more emboldened about the bull thesis on tech and AI this year, despite obviously this massive pullback.”

Stocks that could rebound

Ives named three industry leaders that he sees as being unfairly punished in today’s market, and that could be in for a powerful rebound:

Ives called the software stock correction a “structural selloff” that was the largest in scale he’d seen in 25 years. But instead of spelling doom for these companies, he framed the wipeout as a once-in-a-lifetime opportunity to invest in enterprise technology, arguing that software developers will remain a “core part of the use cases,” even in an AI-powered future.  

Speaking to Bloomberg earlier in the week, Ives gave more details. He classified AI’s effect as a near-term headwind that would eventually enhance software companies’ performance. Digital security needs for enterprise customers are one hurdle, he said. Outside vendors or homegrown AI-generated software might struggle to compete with firms like Salesforce, which benefit from “decades of data” and institutional trust built in with long-standing customers, Ives said.

Ives isn’t alone in viewing the software slump as a red herring. Last week, Goldman Sachs CEO David Solomon called the selloff “too broad” and said not every software development company would experience lasting pain from it. Also last week, JPMorgan analysts took a similarly upbeat position, calling the narrative surrounding AI’s software disruption an “overly bearish outlook.” In a note, they wrote that investors should actually expect a rebound given the otherwise solid fundamentals of software companies, and that legacy digital infrastructure providers would likely be insulated from AI disruption in the near term as enterprise customers are saddled with high switching costs and multiyear contracts.

To be sure, AI disruption could still take some big scalps in the software world, and many stocks that have been highly valued for their AI exposure could also suffer a costly correction. In December, Microsoft cofounder Bill Gates said in an interview with CNBC that the AI industry had become “hypercompetitive,” and that some companies heavily involved in AI’s build-out risked becoming overvalued.

“AI is only a bubble in the sense that not all these valuations will end up going up. Some of them will go down,” he said.

For now, fortune could favor the bold when it comes to declining AI-exposed stocks if they do rebound, especially given the pricey valuations investors would otherwise have to cough up just to get their foot in the door. As Morgan Stanley analysts put it in a note last week, hammered software stocks—including Gates’ own Microsoft and Intuit, a tax filing provider—could retrospectively end up being “attractive entry points.”