alt Hacker NewsWhy software stocks are getting pummelled
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> The fear is that these [AI] tools are allowing companies to create much of the software they need themselves.
AI-generated code still requires software engineers to build, test, debug, deploy, secure, monitor, be on-call, support, handle incidents, and so on. That's very expensive. It is much cheaper to pay a small monthly fee to a SaaS company.
So one thing that hasn't changed is that the marginal cost of software is still effectively zero. That's where most of the money was being made b/c if you were a monopoly or oligopoly that each additional unit sold was an absolute increase in revenue and you spread out your fixed costs.
What has changed most dramatically is the "fixed" cost of writing the software to begin with. Given that the costs were being spread out over so many units beforehand, it's not entirely clear to me how that changes a lot of the economics.
For the comments about the "SaaS vs build your own", we can use a home services metaphor. Sure, I can do a lot of what my plumber does. But they do it faster, know all of the issues that go wrong with the work and I can pay them a yearly fee to check my boiler to make sure it doesn't fail etc. The time saved by calling the plumber can then be spent with kids, more work or a combo of the two.
Is it AI or just the market realizing that some of these companies were ridiculously overvalued to begin with.
Here are the p/e ratios of companies mentioned in the article, after the said "pummeling":
* ServiceNow - 70.66
* SAP - 28.70
* Salesforce - 28.15
* Workday - 73.16
* Microsoft - 26.53
So they range from "a bit high" to "still completely bonkers".
Maybe just maybe, the markets are not as rational as these people think they are
The Value of software is going down, this much is clear to most people. It will continue to demand proper engineering for its creation and operation. But AI will lead to an increase of unique one-of-a-kind systems created by very small teams. And the world will increasingly rely on these unique systems.
SaaS companies need to start reading the writting on the wall, their massive valuations enjoyed when software was harder to create will need to be justified.
> Of course, ai will continue to improve. But it is also likely to get more expensive…Microsoft’s share price took a beating last week as investors winced at its enormous spending on the data centres underpinning the technology. Eventually these companies will need to demonstrate a return on all that investment, which is bound to mean higher prices.
That’s not how it works, and I’m surprised this fallacy made it into the Economist.
Commodity producers don’t get to choose the price they charge by wishful thinking and aspirational margins on their sunk costs. Variable cost determines price. If all the cloud companies spend trillions on GPUs, GPU rental price (and model inference cost) will continue going down.
Indeed, cheaper and cheaper AI for the same level of performance has been even more consistent empirically than improvement in frontier model performance.
I was one of the nay sayers but right now I am convinced.
That being said, it still requires some engineering background to come up with interesting ideas and solutions with the help of LLMs but even that might be replaced.
The iShares Expanded Tech-Software Sector ETF (IGV) seems to backup what the article is saying. It isolate software firms from the IT industry. It is down about 10% last week, and 20% down the past six months. The IT sector as a whole didn't lose much.
Other than smaller SaaS companies who offer things easily replaceable, I don't think many of the bigger ones can be replaced by AI, if anything, it might make them better. For instance I can't see us replacing our ticket management/support software, hosting, manufacturing/sales/stock software, accounting software, etc but it would be great if we could leverage all those tools better via AI (some are already easy to leverage).
The interesting thing I've noticed is software library authors could take a beating though. Quite a few libs in the .NET world have gone down the monetized paths, for all of the ones I've been using, I've just got AI to remove them and implement native solutions. But none of these are large listed companies.
There are many stories on r/ClaudeCode of developers realizing the power of that particular model.
Think of all the solo developer webapp/mobile "hot" startups (FB, Craigslist, Instagram, SnapChat, Pinterest, etc.).
It is no joke that a seasoned developer can build similar apps with Claude in...days. Not just the app, but the entire infrastructure (e.g. scalable on AWS using Terraform). This includes setting up domain registration, Elastic IPs, provisions the instances, setting up keys/ELBs/email server/Twilio/etc.
What is astonishing is how well Claude can plan. You write a spec, and it will give you an entire plan including ASCII UML diagrams, infrastructure changes, database updates, the code itself, user stories, and test cases. It will then do all the work, including "tricky" things like SSHing over a bastion to run the scripts that it wrote on an instance behind a VPC.
The main obstacle now is the context window. If it were to increase 100x or so, Claude could probably manage an entire software company's codebase at scale.
I'm sorry to say, but there's no way you could use Claude for a month or so without feeling, "We are going to need way fewer software engineers."
Is the pummeling in the room with us right now? YoY looks phenomenal in my portfolio.
If I were confident it were AI as the cause I'd be seriously tempted to buy right now
Take Adobe for example: they're getting pummeled and there's no way it's due to AI
No-one's building an in-house Photoshop clone to replace them
AI also isn't letting any competitors in. Geez if it were as easy as cloning their product you'd have a mile high mountain of VC money to fund it even pre-AI
Code has never been much of a barrier to entry
It’s not that AI will replace softwares. It’s that AI will replace people using softwares. Less workers means lower sales. There will be exceptions but a big chunk of B2B space is basically going away.
What an odd article that is just designed to hype the software creation aspect, which doesn't really affect MAGAF.
MSFT went down because of overexposure in AI and because it is clear that people do not want it.
AI weariness is a thing, and if people go off the Internet or advertisers question whether humans or AI swarms are "watching" their ads it is over for the big players.
Trying to salvage the situation by hyping the relatively small code generation (theft) aspect is quite a poor analysis.
There’s only so much investable capital available, if it is going to hardware stocks it’s got to be coming from somewhere else. It’s just a substitution toward hardware tech stocks. Economics 101.
QQQ is up 20% over the last year.
GOOG is up 70% over the last year.
"Pummelled" seems extremely sensational...
This article crystallizes something I witnessed firsthand last week.
Overheard a guy at a restaurant explaining how he builds phone apps with AI and no coding experience. When asked how he verifies the code works, he said he pastes it into a different AI to explain it.
That's the "slopware" problem in action. The code compiles. It might even work. But there's no understanding of what it's actually doing, no ability to debug when it breaks in production, no awareness of the technical cruft accumulating with every prompt. That's a problem for people creating software for others and is a huge opportunity for software developers to take prototypes and build real stuff.
Does anyone remember the RAD days of the 90s?
On the flip side, for people making software to solve THEIR problems, they don't need to make anything production quality. Its for a single user, themselves! Maybe the LLMs are good enough now that people don't need to buy or subscribe to software that solves trivial problems as they can build their own solutions. Maybe the dream of smalltalk, hypercard, and even early web where anyone can use the computer of what it was meant for is finally here?
Whatever the reason, the result is probably more layoffs.
Meanwhile, in the real world, as a software developer who uses every possible AI coding agent I can get my hands on, I still have to watch it like a hawk. The problem is one of trust. There are some things it does well, but its often times impossible to tell when it will make some mistake. So you have to treat every piece of code produced as suspect and with skepticism. If I could have automated my job by now and been on a beach, I would have done it. Instead of writing code by hand, I now largely converse with LLMs, but I still have to be present and watching them and verifying their outputs.
the crash is indiscriminate, which is really disheartening. even infra software is getting demolished, no llm is going to replace something like mongodb, but it's all traded under the same umbrella.
investors are panicking.
however those system of record apps - will outlast most "A.I" companies - since the effective data is within their systems
Investors do not understand how coding works.
Google "Project Genie" which allegedly can take your input and the AI will make it rain, drove investors into panic mode. They think that you can create GTA6 like that.
It was the perfect storm: clueless investors + the whole AI bubble already bursting if you are following non-biased news.
The cleanup needed after this by senior developers will be epic.
Or it could be just the good old cyclical stock market correction after years of entire segments of the indecies growth being purely driven by software.
Of course such an angle would require much more research on behalf of the journalists for much less spotlight than what you would get for free by just singing to the tune of the AI-doomerism.
... because they've been driven by years of bad leadership, monopolistic scheming, and investor speculation?
AI is just the latest symptom, IMO.
We normalized growth over revenue. Governments around the world have been pressured by Big Tech to dismantle anti-trust and regulation. We glorified shipping slop, suppressing unions, and pretending like programmers were temporarily embarrassed founders.
The stocks are dropping because our system can't sustain these practices, IMO.
Certainly no investor, but my own feelings:
AI replacing vendors feels like a strange risk, though I'm not sure if vendors view things through a technical lens. Security concerns and service maintenance alone, IMO, makes writing internal software a large proposition - one that I would want a trusted vendor if it wasn't a hobby project and I could just afford that. Particularly if that data being lost or broken would severely harm a business.
There are also already frameworks in languages like Python that make putting up an internal website very, very simple. If you don't need production grade, you might have already had a pretty low barrier to entry, if you have the skills to figure out how to host the service you just vibe coded, you can probably figure out some basic django to throw data in its ORM, or find libraries that do the work for you.
AI does feel in those technical ways to be an overstated risk, to me at least.
Far more worrying to me is the breakdown of the USA and its role. We are going to have blocs of software and hardware entirely from competing geopolitical regions, which may not be able or authorized to communicate with one another. Any businesses in the USA with significant CA or EU marketshare right now will decline in value to the degree client companies choose, or are told, to stop using USA systems.
(My own governor in California outright antagonized the Europeans at Davos calling them "pathetic" while telling them to get tough on Trump, which means in practice, stop using US, meaning yes California, tech goods and services. A lot of revenue from tech comes from overseas, and we are going to lose at least some portion of that. Particularly in California which already has budget problems with what revenue it's got. Stunning how even The Guardian treated those remarks as "tough" and not insane and self-destructive... sadly it's nothing compared to the worst of the US right now.)
So, where do you throw investment right now? To the US where the marketshares will likely decline, and the political and trade environment is insanely uncertain, but there is momentum on AI and generally decent hardware design, and the existing software companies and knowledge? To the EU or Canada where maybe a nascent software industry will take hold, or perhaps American companies will relocate talent if the USA collapses into civil conflict? To China, if they end up becoming a hegemon, given their strength in hardware and their growing efforts to invest in software alternatives?
I suppose I read markets don't react to "tensions," and maybe it is unprecedented to modern memory, but I think about these things more than AI.
Because the bubble has began to burst.
It always amuses me because the people complaining about stocks going down are always the same people who are causing them to go down. Losing money was a choice that those people collectively made. They could have chosen to act differently, in light of the optimistic long-term future.
Software will be easy to create, which will kill moats and margins on existing products. The game is up for pure saas. Smart money started pricing this in one year ago
I wonder when a "virtual person" will be able to replace carefully-coded business software?
IE, before software automates a business process, it's typically done by hand, by a real person.
What if someone sells a "virtual person" that's capable of doing the job? What if that "virtual person" is harder to train than a real person, but orders of magnitudes easier than writing custom software or custom business rules?
More importantly: What if the "virtual person" can explain the job they do much better than trying to read source code? That's very useful in ~30ish years when the "virtual person" understands the business process better than the people in the company, and someone is trying to update / streamline processes.
No, they dont distrust AI, they now may start to distrust all the big service providers that are likelty to eventually be eradicated by AI now that everyone can prompt a browser. This perhaps will also finally kill Microsoft Access, which is the closest to AI doing the work instead of you for so long. Then all the do-it-yourself enterprise-grade systems became SAAS, so its right for SalesForce and friends to go fck themselves once in a lifetime for standing in the way of actual software ownership.
I know, you are saying - they will adopt. Perhaps, while also cutting 40% (if not more) personnel during the pivot, and perhaps also by facing more challenges by faster moving competition.
Like, look for a second - why didn't Google create what the perplexity newsfeed is, given they actually like did 10 years ago and then close to nobody was using it. The equilibrium seems super unstable. What happens if a smart kid devices way to compress this information 10x times faster. This immediately means neural chips stall.
This volatility is something, not a joke. The second order effects may be unforseeable in an unparalleled way. Besides, the Luddites organize much better in 2026 given reddit etc.
https://archive.ph/37Hwn