The Existential Threat of AI to Application Software Firms

Nick Evans, a fund manager at Polar Capital, has raised alarms about the future of application software firms in light of advancements in artificial intelligence (AI). He asserts that many companies in this sector face an "existential threat" due to the rapid development of AI tools capable of replicating and modifying existing software. This perspective has led him to divest from most software stocks, with the exception of a small position in Microsoft Corp.

Bloomberg

The software sector has experienced significant turmoil, with an exchange-traded fund tracking U.S. software stocks declining by 22% this year. In contrast, semiconductor stocks have thrived, driven by increased demand for computing power spurred by AI innovations. Evans' fund, which has outperformed 99% of its peers, reflects a broader concern that established software companies may struggle to compete against both AI startups and their own clients, who are developing internal tools to reduce costs.

Bloomberg

Nick Evans manages a $12 billion global technology fund at Polar Capital. His investment strategy has shifted dramatically, with a focus on semiconductor companies, which now make up seven of the top ten positions in his fund. Evans has expressed skepticism about the long-term valuations of application software firms, citing the growing power of AI tools.

Bloomberg

While Evans warns of a bleak future for application software, some strategists at JPMorgan Chase & Co. argue that software stocks may rebound after recent price declines. They advocate for investments in companies like Microsoft and ServiceNow, suggesting that not all software firms are equally vulnerable to AI disruption. Evans acknowledges that certain sectors, such as infrastructure software and cybersecurity, may be less affected, indicating a nuanced debate on the potential for recovery in the software market.

Bloomberg

Evans has advised investors to be "significantly underweight" in application software, emphasizing the need for quick reactions as AI models improve. He believes that the current market prices do not accurately reflect the uncertainties surrounding terminal values and free cash flow pressures for software companies. His fund has increased holdings in infrastructure software firms like Cloudflare Inc. and Snowflake Inc., which are experiencing rising demand.

Bloomberg

Evans predicts a painful shakeout in the application software sector, likening it to the decline of print media in the 2000s. He foresees that only a few companies will survive this transition, urging investors to reassess their positions in light of the accelerating disruption caused by AI advancements.

Bloomberg

• “We think application software faces an existential threat from AI,” — Nick Evans, Fund Manager, Polar Capital

Bloomberg

• “We won’t go back to these companies,” — Nick Evans, Fund Manager, Polar Capital

Bloomberg

• “Investors should be “significantly underweight application software and they have to react quickly, because as the models get better, the disruption is accelerating,” he said.” — Nick Evans, Fund Manager, Polar Capital

Bloomberg