Will AI Eat the Lunch of Software Companies?

On the Feb. 8 episode of The Morning Filter_, _David Sekeraand Susan Dziubinski discuss last week’s pullback on software stocks and what investors need to know about artificial intelligence’s unending acceleration. Here is an excerpt from the episode.

Should Investors Worry About the Software Stock Selloff?

Susan Dziubinski: We saw a multiday selloff in tech last week, with stocks like Microsoft MSFT, Salesforce CRM, ServiceNow NOW all finished the week down between 7% and 14%. And, of course, these are names that Morningstar has been recommending over the past year or so. So tell us what your take is on this ongoing pullback in these names. Is AI just going to eat the lunch of software companies?

**David Sekera: **Oh, good morning, Susan. What a way to start the show. So as far as like the software stocks, I mean, they’d all been falling for at least the past year now, if not even a little bit longer. And to be honest, I think it is a little unknowable exactly how it’s going to work out, how it’s going to evolve, how AI and software are going to interact with one another. So I really recommend to investors to read a note that was recently published by Dan Romanoff. He’s our equity analyst that covers a lot of these software names. The title to it is “The only thing to fear is fear itself;” We see buying opportunities in software.” So that kind of sets up our discussion here this morning. So just a quick synopsis of his note: I would say, essentially, our investment thesis is such that we don’t think companies are going to recreate entire software platforms. We think it’s more likely that third-party providers will end up using artificial intelligence to be able to enhance their platforms, add more economic value for their clients, and that overall, in the long term, we still think it’s going to be more cost-efficient to use third-party software providers in the future.

Where are we today with the software companies? Where are we as far as like artificial intelligence displacing software? Generally, I think, what our team has seen, what they call like a do-it-yourself AI software projects at most companies, have been failing; they have not been able to replace the software that they’ve been using from outside providers. And in fact, the Agentic AI software from those software companies really is only just starting to even come online. In and of itself, if you look at all the software companies, what we consider to be true AI offerings is still only about 2% of revenue. So I’d say a lot of this is still yet in its infancy, and still yet to come in the future.

So for investors, what should you be looking at if you want to start diving in on some of these software companies? A lot of these stocks are not only 4 stars, but deep into 5-star territory at this point. So I’d say, look for those that you consider to be the most complex, the most complicated software platforms, software that has the most touch points within their own clients’ businesses. So those will have the greatest switching costs. And, of course, those that are most embedded into their client operations. I know the two software picks Dan has most recently highlighted is going to be Microsoft. We’ve talked about Microsoft ad nauseam on the show for months, if not well over a year now. But when I think about ServiceNow, I think one of the reasons Dan likes that stock and that company is their entire business model is made to automate processes. And that’s really what AI at the end of the day is used for. So, I mean, their entire business model is trying to figure out how we improve the business process at individual companies. Right now, it has the best AI uptake in the software space, I think it’s double what the average is across most other software companies. So I think that’s a really interesting one for people to take a look at if you want to get involved in the software space.

What to Know About the Software Stock Selloff

AI fears sparked major losses this week. Is the market overreacting?

Is the AI Trade Dead?

**Dziubinski: **Now, we’re also seeing key names from the AI trade names like Nvidia NVDA and AMD losing ground this year, so is the AI trade dead?

**Sekera: **No, not dead yet. I mean, when I think about the AI buildout boom, it’s still in the part of the technological cycle where it’s growing at an accelerating rate. The projects that have already started, those are going to get completed. There’s no evidence at this point that anyone is pulling back on the AI buildout boom. In fact, it’s really just the opposite. We’re seeing more new money going into the AI buildout boom. Looking forward, I think we’ve got at least another year of these type of conditions before anyone reevaluates and potentially starts slowing the pace of spending. What we’re seeing is that the hardware needed for the AI buildout boom is in shortages across the entire supply chain. And when that new computing capacity comes online, there’s people lined up out the door waiting for that capacity, huge amount of demand. So no, at this point, still probably at least another year of this AI buildout boom yet to come.

Subscribe to The Morning Filter on Apple Podcasts_, or wherever you get your podcasts, and keep up with the latest research from hosts Susan Dziubinski and David Sekera on Morningstar.com._

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			34m 52s
		 Feb 9, 2026

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