Opportunities Abound Amid Overblown Software Selloff

By: Ron Eliasek

Jefferies Chairman of TMT, Head of Software

Fifteen years ago, Marc Andreessen famously said, “Software is eating the world.”

But on February 3, public software companies lost $300 billion in market value amid fears that new tools like Anthropic’s Claude Cowork will eat their business models. At one point, the IGV iShares tech-software ETF was the most oversold ever relative to the broader S&P 500 index, according to an analysis by my colleagues in Jefferies Equity Research.

However, there are good reasons to believe the indiscriminate selloff is overblown. Artificial intelligence will be transformational – and arguably already is – but software companies with deep moats, trusted brands, and top talent are still positioned to thrive. Moreover, many good profitable companies are on sale, with shares of both application and infrastructure software companies down 22% and 17%, respectively, in the last three months.

We have been hearing four primary concerns from investors about the software market, yet we believe quality software companies have credible answers to all of them:

Although we believe the recent software selloff may have been overdone, it should focus investors’ minds on the primacy of product leadership, as software companies can no longer win with just features and tools.

The software companies poised to thrive in an increasingly AI-enabled world will be those that leverage domain-specific and proprietary data to help customers execute mission-critical tasks and manage ecosystem integrations. Enterprise customers will still want to partner with trusted brands, led by talented people with deep domain knowledge. And over time, good software companies will benefit from the substantial in-house investments they are making in AI R&D.

AI may indeed change everything, but it has not changed the value proposition for incumbent software companies that can sustain and expand their competitive moats.