AI Sparks Existential Crisis for Software Stocks

Fears that SaaS subscription software could be rendered obsolete by artificial intelligence make investors jittery. When you purchase through links on our site, we may earn an affiliate commission. Here’s how it works. Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.You are now subscribedYour newsletter sign-up was successfulWant to add more newsletters?Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirementInsights for advisers, wealth managers and other financial professionals.Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.To help you understand the trends surrounding AI and other new technologies and what we expect to happen in the future, our highly experienced Kiplinger Letter team will keep you abreast of the latest developments and forecasts. (Get a free issue of The Kiplinger Letter or subscribe.) You'll get all the latest news first by subscribing, but we will publish many (but not all) of the forecasts a few days afterward online. Here’s the latest…Anthropic, an advanced artificial intelligence company, is making waves. Its top AI is so good that it has caused Wall Street to second-guess an entire sector. The buzz started with Anthropic’s coding tool, Claude Code, which has wowed many programmers with its ability to automate tedious coding tasks, saving a huge amount of time.

With Claude Code, a human worker manages autonomous AI coding “agents,” which take on multi-step tasks, checking in when necessary. The tool can read and write its own files, saving a trove of useful documentation for later. OpenAI, Gemini and others have similar tools. Last month, Anthropic unveiled a product that brings these AI features to knowledge work. Claude Cowork, a chatbot built to act like a talented personal assistant, can access files and data on a computer to organize a messy desktop, create a spreadsheet or summarize meeting notes. Users set permissions and pick what files and data can be accessed. Built for nontechnical users, it’s sure to be popular.It was the Cowork announcement that sent shockwaves through the business software market, sparking a sell-off of a category known as subscription software as a service, or SaaS. Companies caught in the crosshairs included Salesforce, Adobe, Workday, ServiceNow, SAP, Oracle and DocuSign. Sector-specific software, in legal, finance, tax, IT and other areas, was hit too. Consider several major fears for the software industry. One is that AI chatbots become capable of replacing subscription cloud apps for finance, design, sales, project management and more. Another is that AI coding tools mean that companies will opt to build custom software rather than purchase it. Finally, there’s the risk of increased competition and pricing pressure, as the proliferation of AI tools makes it easy for start-ups to enter the business software market. The traditional approach to buying subscription software is based on headcount, since it’s priced per user. Businesses usually need an entire staff to use Microsoft 365 or have access to Zoom videoconferencing. An entire sales team may need access to Salesforce’s customer management product. But what happens when an AI coworker, or multiple AI coworkers, can do the task of many people? A growing concern is that these new automated AI tools, which keep getting better, will disrupt the entire SaaS pricing system.It’s clear that programmers who use AI coding tools see huge potential and quick productivity gains. It changes the workflow of a software engineer “as completely as it could be changed,” said Noah Brier, the co-founder of Alephic, an AI consulting company, in a recent Bloomberg podcast. Unlike some other areas of work, coding is verifiable and can be checked to see whether something works or not. That makes it ideal for automation. AI’s coding output could soon affect headcounts at large tech companies. Expect efforts to streamline technical staff while chasing higher productivity. There will also be pressure on top software vendors to shrink their workforces.However, some stock analysts are skeptical of the gloom and doom. “We believe the fears of broad disruption to software vendors are largely overstated,” writes Arjun Bhatia, analyst at William Blair, in a recent research note. Software companies that perform general tasks are likely most at risk, while some analysts believe the fears are overblown for specialized software. Companies in domain-specific areas are more resilient, notes Siti Panigrahi, analyst at Mizuho Americas, in a recent note. Such vendors, like Autodesk, Bentley Systems, Cadence Design Systems and Synopsys, include deep technical knowledge and complex decision-making systems. Plus, these types of companies focus on high accuracy, regulatory compliance and proprietary data, notes Panigrahi. Software companies aren’t standing still. Major vendors, such as Salesforce, are quickly integrating AI, while continuously updating features across the board. Internally built systems for customer management, IT services and human resources “will simply not be able to keep up with the vendors that focus on these areas,” writes Bhatia. Even if the fear of disruption is overblown, expect more competition and continued turmoil in markets, as AI spooks sectors ranging from wealth management and financial data to medical software and legal services.This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special IssuesProfit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.Profit and prosper with the best of expert advice - straight to your e-mail.Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.John Miley is a Senior Associate Editor at The Kiplinger Letter. He mainly covers AI, technology, telecom and education, but will jump on other business topics as needed. In his role, he provides timely forecasts about emerging technologies, business trends and government regulations. He also edits stories for the weekly publication and has written and edited email newsletters.He holds a BA from Bates College and a master’s degree in magazine journalism from Northwestern University, where he specialized in business reporting. An avid runner and a former decathlete, he has written about fitness and competed in triathlons. Exchange-traded funds are cheaper, more tax-efficient and more flexible. But don't put mutual funds out to pasture quite yet. We are 62 and finally retired after decades of hard work. I see the lakehouse as an investment in our happiness.

Your Social Security break-even age tells you how long you'd need to live for delaying to pay off, but shouldn't be the sole basis for deciding when to claim.

The Kiplinger Letter An emerging public health issue caused by artificial intelligence poses a new national security threat. Expect AI-induced psychosis to gain far more attention.

The Kiplinger Letter The entertainment industry is shifting as movie and TV companies face fierce competition, fight for attention and cope with artificial intelligence. For financial advisers eager to embrace AI but unsure where to start, this road map will help you integrate the right tools and safeguards into your work.

The Kiplinger Letter Robot makers are in a full-on sprint to take over factories, warehouses and homes, but lofty visions of rapid adoption are outpacing the technology’s reality.

The Kiplinger Letter The President starts the new year by putting allies and adversaries on notice.

The Kiplinger Letter The Letter editors review the bills Congress will decide on this year. The government funding bill is paramount, but other issues vie for lawmakers’ attention. The ability of AI to reduce the time required for certain legal tasks is exposing the legal profession's reliance on the billable hour.

The Kiplinger Letter Here are some of the biggest events and trends in economics, politics and tech that will shape the new year.