Darius McDermott, Managing Director of FundCalibre says it will require an active approach to find the winners in what is undoubtedly a challenging market where sentiment is playing a major role.
Software companies are woven into almost every part of modern daily life – often invisibly. They don’t just make apps; they build the systems that run communication, work, entertainment, finance, and even physical infrastructure.
The sector was almost a sure thing for investors at one point. Global software revenue grew by almost 50% between 2020 and 2024, rising from $454 billion to $675 billion*.
This surge was driven by heavy spending during and after Covid, as cloud computing – particularly software as a service (SaaS) – accelerated digital transformation across industries, and subscription-based, recurring revenue models became more embedded in everyday life.
High margins, scalability and strong cash flows allowed many firms to grow revenues.
However, growth has started to slow more recently as investors became less willing to pay high multiples for growth.
Then along comes AI and the dramatic re-pricing of the sector, driven by fears that agentic AI could disrupt software companies’ business and revenue models.
As research from Julius Baer highlights: “As chatbots and agentic tools (systems capable of taking autonomous, goal-directed action) get closer to the user and automate tasks once handled by enterprise applications, suddenly software looks more vulnerable than hardware.”
By 2030, it’s estimated that AI agent-powered solutions could represent 60% of the total addressable software market, setting up a race between AI-native companies and incumbents**.
The reality is we’ve actually seen a flip with hardware being seen as a more reliable source of investment than software companies.
The additional costs from using large language models (LLMs), investments in new agentic products, and hybrid pricing could pressure future revenues and margins for software companies going forwards.
Established players to flourish?
Every market goes through a prolonged period of consolidation at some point and AI could be the trigger for software companies.
Figures from Deloitte show that the market cap for software companies hit $4 trillion in 2025 (it was only $1.9 trillion in 2022), with the top 10 SaaS companies accounting for more than half the market-cap**.
The research agency says the AI agents can drive substantial new growth for established players, citing that 40% of enterprise applications will be integrated with task-specific AI agents by the end of 2026, up from less than 5% today**.
The question is whether the market’s indiscriminate approach to software companies has gone too far, creating opportunities in a sector once known for its high multiples.
Capital Group, which runs the Capital Group New Perspective fund, investment director John Lamb, says the market will start to recognise that there are some companies which possess characteristics that make them less vulnerable to AI disruption and, potentially, even beneficiaries as they weave AI features into their products.
He says an example of such a characteristic is if a company provides proprietary data that is recognised as a ‘gold standard’, particularly in highly regulated and/or professional services industries.
Lamb says: “While AI can increasingly generate content, automate processes or write lines of code, it still relies on trusted, accurate and context-rich data to deliver meaningful outcomes.
From our perspective, this reinforces the importance of bottom-up analysis.
75% disruption – but still plenty of software winners
T. Rowe Price Global Focused Growth Equity portfolio specialist Daniel Hurley says they believe up to 75% of the software market will be disrupted by AI – that may sound negative, but he is quick to point to the flip side (the 25% of winners).
He says they will be those firms with a real moat around their business; those, for example, which may own their own data or their technology is embedded with their clients, making it more difficult to step away from those software stocks.
Brunner Investment Trust co-manager Julian Bishop cites AutoTrader as an example, pointing to a significant de-rating, despite there being no reduction in earnings expectations in the near term.
He questions how the current proposition of businesses like AutoTrader can be bettered by AI.
He says: “At the heart of these businesses we have a network effect of buyer and sellers and a database of current information.
We struggle to see how having AI traipse 10,000 terrible websites from individual auto-dealers, which are probably out of date, will be a better consumer proposition.”
At the top-end of the market, Nutshell Growth manager Mark Ellis points to Microsoft share price falling in the past year or so on the back of the same uncertainties.
He says: “Why replace Microsoft with something AI can do – and not necessarily to a better level?
Everyone is assuming the worst. It is a top-tier company with robust moats and AI could easily enhance demand. There are no signs of degradation in Microsoft’s fundamentals from AI in the past couple of years.”
The position for investors from here is less clear – but there will be opportunities
You only have to look at some of the well-known names to see how stark the sell-off has been.
Over the past 12 months, share prices have fallen by around 31% at Spotify, 32% at Salesforce, 20% at Netflix, 33% at Adobe, 49% at Workday, and 53% at ServiceNow, reflecting widespread uncertainty***.
AXA Global Technology co-manager Matthew Ward says the market is telling investors to be patient and wait, given the opportunity cost associated with much of the software sector.
He believes companies will emerge as success stories, provided they have those aforementioned data or distribution moats which cannot be replicated.
He says: “If you are delivering real value to customers and can use AI tools (and are able to charge for that) and you haven’t been egregiously pricing and you have been investing in your product, then your business should be alright.
You also don’t want to be going through organisational change in this environment.”
After years of strong growth there is now significant pressure on this sector of the market, but there are likely to be plenty of winners who can make AI a tailwind for their business.
However, it will require an active approach to find these winners in what is undoubtedly a challenging market where sentiment is playing a major role.
*Source: WIPO, 2 June 2025
**Source: Deloitte, 2026 Global Software Industry Outlook, February 2026
***Source: GoogleFinance, at 5 May 2026
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
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