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Apollo Global Management Inc

Tech

Some software names hit by AI deserve a valuation cut

by Chief Editor
written by Chief Editor

AI’s Impact: Software Valuations Under Scrutiny

The artificial intelligence revolution is rapidly reshaping the software landscape, leading to a critical reassessment of valuations. Orlando Bravo, co-founder of Thoma Bravo, recently stated that some software companies facing disruption from AI are experiencing “very warranted” decreases in their valuations. This comes as AI model companies release tools that threaten to replace existing software services at a lower cost, impacting the entire industry.

The Disruption is Already Here

Bravo emphasized that many companies currently being disrupted by AI were already facing underlying challenges. The rise of AI is simply accelerating the inevitable for some, while others are being unfairly penalized in the market downturn. The iShares Expanded Tech-Software Sector ETF (IGV) has fallen roughly 28% from its peak in September, illustrating the broad market correction.

Thoma Bravo’s Own Lessons Learned

Acknowledging past missteps, Bravo admitted that Thoma Bravo overestimated growth rates during its $6.4 billion acquisition of Medallia in 2021, leading to an overpayment. This candid admission highlights the challenges of accurately forecasting growth in a rapidly evolving technological environment.

Winners and Losers in the AI Era

Despite the overall market turbulence, Bravo believes some software companies are being unduly punished and are poised to thrive in the “agentic era.” These “phenomenal businesses” possess characteristics that allow them to leverage AI effectively, but he did not specify which companies he believes fall into this category.

Apollo’s Critique of Private Equity Valuations

The scrutiny of software valuations extends beyond Thoma Bravo. Apollo Global Management President John Zito recently criticized “arrogance” in software valuations within the private equity sector, specifically referencing the Medallia acquisition. This suggests a broader industry-wide reckoning regarding pricing and expectations.

The Future of Software Investment

Bravo’s comments align with a growing sentiment that AI valuations are currently in a bubble, reminiscent of the dot-com era. While AI presents immense opportunities, investors are becoming more discerning, focusing on companies with strong fundamentals and a clear path to profitability.

AI Boosts Developer Productivity

Interestingly, a recent discussion between Orlando Bravo and IBM CEO Arvind Krishna highlighted the positive impact of AI on software development. Krishna shared that AI is boosting developer productivity, expanding entry-level hiring opportunities, and unlocking billions in back-office automation. IBM has reinvested savings from automation into software R&D and growth.

FAQ

Q: Is AI a threat to all software companies?
A: No, AI will disrupt some companies more than others. Those with deep domain expertise and the ability to integrate AI effectively are more likely to succeed.

Q: What is an “agentic era”?
A: The “agentic era” refers to a future where AI agents are layered on top of existing systems, automating tasks and providing intelligent assistance.

Q: Did Thoma Bravo make a mistake with the Medallia acquisition?
A: Yes, Orlando Bravo acknowledged that Thoma Bravo overestimated Medallia’s growth potential and paid too much for the company.

Q: Are software stocks currently oversold?
A: Orlando Bravo believes some software stocks are oversold, while others are experiencing justified valuation corrections.

Pro Tip: Focus on software companies with strong domain expertise and a clear strategy for integrating AI into their offerings. These are the businesses most likely to thrive in the long run.

What are your thoughts on the impact of AI on the software industry? Share your insights in the comments below!

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Business

Private credit stocks plummet on concern about exposure to software industry disrupted by AI

by Chief Editor
written by Chief Editor

AI’s Shadow Over Private Credit: Why Big Names Are Feeling the Heat

The stock market delivered a stark warning this week: the booming world of private credit isn’t immune to the disruptive force of artificial intelligence. Shares of major players like Blue Owl, TPG, Ares Management, KKR, Apollo Global, and even BlackRock took significant hits, fueled by fears that their substantial holdings in private credit are exposed to industries facing upheaval from AI – particularly software.

The Software Sell-Off and Its Ripple Effect

Publicly traded software companies have been under pressure all year. Investors are increasingly concerned that AI tools, like Anthropic’s Claude Code, will allow businesses to build their own software, diminishing the need for expensive, off-the-shelf solutions. This has already manifested in a 20% drop year-to-date for the iShares Software ETF (IGV), with another 5% decline on Tuesday alone. But the impact isn’t limited to public markets.

Private credit firms, which lend directly to companies, often have significant exposure to the software sector. According to UBS analysts, between 25% and 35% of the entire private credit market could be at risk. That’s a considerably higher concentration than in the high-yield corporate bond market, where technology exposure is around 8% (using the iShares iBoxx High Yield Corporate Bond ETF (HYG) as a benchmark).

Pro Tip: Private credit, while offering potentially higher returns, typically comes with less liquidity and greater concentration risk than publicly traded bonds. This makes it particularly vulnerable to sector-specific shocks like the one we’re seeing with AI and software.

Two Ways AI Impacts Private Credit Firms

The pain for these firms is two-fold. First, their private equity arms could see lower returns if software companies are revalued downwards, impacting carried interest on tech-focused investments. Second, and more immediately concerning, is the potential for defaults and redemptions within their private credit portfolios.

UBS estimates that U.S. private credit default rates could jump to 13% if AI triggers widespread disruption, compared to just 4% for high-yield bonds. This isn’t just about individual company failures; it’s about a systemic shift in the competitive landscape.

Did you know? The current situation is different from the “cockroaches” Jamie Dimon warned about last year, which were largely isolated incidents of fraud. This software rerating represents a broader, sector-wide challenge for private credit.

Beyond Software: Where Else Could AI Pose a Threat?

While software is the initial focal point, the potential for AI disruption extends far beyond. Any industry reliant on repetitive tasks or data analysis is vulnerable. This includes sectors like customer service, data entry, and even some areas of financial analysis. Private credit firms with diversified portfolios will be better positioned to weather the storm, but even they aren’t entirely safe.

Consider the implications for business process outsourcing (BPO) companies, often funded by private credit. AI-powered automation could significantly reduce the need for these services, leading to revenue declines and potential defaults. Similarly, companies providing data labeling and annotation services – crucial for training AI models – could face margin pressure as AI itself becomes more efficient at these tasks.

What Does This Mean for Investors?

The recent market reaction signals a growing awareness of these risks. Investors are likely to become more discerning, demanding higher risk premiums for private credit investments, particularly those with significant exposure to vulnerable sectors. This could lead to tighter lending standards and a slowdown in private credit deployment.

However, it’s not all doom and gloom. AI also presents opportunities. Companies that successfully leverage AI to improve efficiency, develop new products, or gain a competitive edge will be well-positioned for growth. Private credit firms that can identify and finance these “AI winners” could generate substantial returns.

FAQ: AI and Private Credit

  • What is private credit? Private credit involves lending directly to companies, bypassing traditional banks.
  • Why is software particularly vulnerable to AI? AI tools can automate software development, reducing the need for traditional software purchases.
  • Could this lead to a wider financial crisis? While a systemic crisis is unlikely, increased defaults in private credit could impact investors and lenders.
  • What should investors do? Diversify your portfolio and carefully assess the AI risk exposure of any private credit investments.

Explore our other articles on alternative investments and the future of AI to stay informed about these evolving trends.

Have questions about private credit and AI? Share your thoughts in the comments below!

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Entertainment

Why the market is worried about Lilly’s earnings but cautiously optimistic on housing

by Chief Editor
written by Chief Editor

AI’s Ripple Effect: Beyond Tech Stocks and Into Financials

The recent market dip, fueled by anxieties surrounding the future of software companies in the age of Artificial Intelligence, isn’t confined to the tech sector. As highlighted by the CNBC Investing Club, the uncertainty is now impacting financial institutions like Blue Owl Capital, KKR, and Apollo Global Management. This demonstrates a crucial point: AI isn’t just a tech story; it’s a systemic risk and opportunity that will reshape the entire financial landscape.

The Private Credit Connection

These financial firms have significant exposure to software companies through private credit and business development companies (BDCs). If AI disrupts the revenue models of these software businesses, their ability to service debt comes into question. This creates a domino effect, potentially leading to defaults and losses for the lenders. A recent report by PitchBook showed a slowdown in private equity dealmaking in Q1 2024, partially attributed to valuation concerns in the tech sector, mirroring this sentiment.

Pro Tip: Diversification is key. Investors should carefully assess the AI exposure of their financial holdings and consider diversifying into sectors less directly impacted by this technological shift.

The GLP-1 Race: Volume vs. Price

The pharmaceutical sector is facing its own AI-adjacent challenges. Novo Nordisk’s disappointing 2026 guidance, triggered by intensifying competition from Eli Lilly in the GLP-1 market (drugs for diabetes and weight loss), underscores a critical dynamic: increased patient access doesn’t automatically translate to profits. The market is bracing for a price war.

Novo Nordisk’s forecast of a 5-13% decline in sales and operating profits, despite market expansion, is a stark warning. The “Most Favored Nations” agreement with the U.S. government, forcing lower drug prices, is exacerbating the issue. This situation highlights the growing pressure on pharmaceutical companies to balance volume growth with pricing power. A study by the Kaiser Family Foundation found that list prices for prescription drugs continue to rise, even with increased generic competition.

What to Watch for in Earnings Reports

Eli Lilly’s upcoming earnings report will be closely scrutinized. Investors will be looking for evidence that increased volume can offset price declines. CEO David Ricks’ cautious optimism – “time will tell” – reflects the uncertainty. The key question is whether the benefits of wider access outweigh the impact of lower prices, especially in the face of aggressive competition.

Housing Affordability: A Potential Trump Card?

Surprisingly, housing-related stocks rallied on news of a potential program to make homeownership more affordable. While still in its early stages and facing political hurdles, the initiative, involving private investors, signals a renewed focus on addressing the housing crisis. The fact that this is gaining traction as a priority for the Trump administration is noteworthy.

Home Depot, poised to benefit from a revived housing market, saw a modest increase despite the broader market downturn. The National Association of Realtors reported that existing-home sales were up in March 2024, suggesting a potential stabilization in the market. However, affordability remains a significant barrier for many potential buyers.

Did you know? The median home price in the U.S. is still significantly higher than pre-pandemic levels, despite recent cooling in some markets.

Upcoming Earnings: A Packed Schedule

The earnings calendar is packed this week, with key reports from Advanced Micro Devices, Super Micro, Chipotle, GE Healthcare, Uber, and many others. These reports will provide valuable insights into the health of various sectors and the impact of macroeconomic trends. Investors should pay close attention to company guidance and commentary on AI adoption and its effects on their businesses.

FAQ

Q: How does AI impact financial institutions?
A: AI disruption in the software sector can lead to defaults on loans made to software companies, impacting private credit firms and BDCs.

Q: What is the GLP-1 market?
A: It’s the market for drugs used to treat diabetes and weight loss, currently dominated by Novo Nordisk and Eli Lilly.

Q: Why is housing affordability a concern?
A: High home prices and interest rates make it difficult for many people to become homeowners, hindering economic growth.

Q: Where can I find more information about Jim Cramer’s Charitable Trust?
A: You can find a full list of the stocks in the trust here.

Stay informed and adapt your investment strategy to navigate these evolving market dynamics. Explore our other articles for deeper dives into specific sectors and investment strategies. Subscribe to our newsletter for regular market updates and expert analysis.

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