AI disruption fears create software dispersion
The guest argued that the sell-off in software stocks due to AI fears has created an environment of extreme dispersion, presenting a highly attractive opportunity for active stock pickers to separate winners from losers.
The argument
Historically, 'disruption scare' stocks exhibit a fat-tailed return distribution where 10% double and 16% lose more than half over the next year. Software companies with enterprise-facing workflows and high switching costs are argued to be better positioned than consumer-facing ones.
The thesis, stress-tested
✓ What validates it
- ✓Stabilization or recovery of enterprise software earnings
- ✓Divergence in performance between high-moat software and low-moat software over the next 12 months
▸ Risks discussed
- ▸AI disruption could be faster and more destructive than historical technological shifts
- ▸High-valuation software names may continue to re-rate downward regardless of their moats
Hear it yourself
"So software stocks were kind of at their all time high valuations. And then 2022, things started to reverse. Valuations started to fall. They went through their historical average around '23. And then the past two years, they've been continually falling, kind of reverting back to, first parity with the market. And then more recently over the course of this year have actually fallen to a discount to the market. So software stocks, at least on this basis, are trading currently at a 10% discount to the market, which has never happened before over the course of this sample."
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