Why the Software Sell-off Doesn’t Tell the Whole Story

The rapid rise of AI is reshaping how investors value software businesses, challenging long‑held assumptions about growth, margins, and competitive moats. For equity investors, this can mean greater dispersion in outcomes as leaders that harness AI to deepen product stickiness and efficiency may see premium valuations, while laggards face pressure on pricing power and relevance. It also raises the risk that some traditional software models become commoditized faster than expected, increasing volatility around earnings visibility and terminal value.

For credit investors and lenders, AI disruption heightens the importance of underwriting durability of cash flows rather than relying on past growth trajectories or sector averages. Balance sheet strength, recurring revenue quality, customer concentration, and a borrower’s ability to invest in AI without overleveraging will be central to assessing default risk.