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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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Tech

Goldman’s five stocks to buy before earnings

by Chief Editor
written by Chief Editor

Wall Street’s Bullish Bets: Decoding the Earnings Season Opportunities

Despite ongoing economic uncertainties, Goldman Sachs is signaling a surprisingly optimistic outlook for select stocks ahead of the current earnings season. Their analysis points to compelling buying opportunities, suggesting that market dips may be temporary and that long-term growth potential remains strong in specific sectors. Let’s dive into the companies catching the eye of analysts and what their picks reveal about broader market trends.

The Streaming Giant: Spotify’s Potential Rebound

Spotify (SPOT) has faced headwinds recently, with its stock down nearly 14% this year. However, Goldman Sachs analyst Eric Sheridan believes this dip presents a buying opportunity. The firm recently upgraded Spotify to a ‘Buy’ rating, citing the company’s steady growth and increasing pricing power. Sheridan highlights Spotify’s ability to capitalize on long-term secular growth themes, particularly as they roll out new premium pricing tiers. This strategy aligns with a broader trend in the streaming industry, where companies are increasingly focused on monetization and profitability.

Pro Tip: Keep an eye on subscriber growth numbers during Spotify’s earnings call on February 10th. A strong subscriber base is a key indicator of the platform’s continued relevance and potential for future revenue growth.

Asset Management Resilience: Why Carlyle Group Stands Out

Carlyle Group (CG) is another stock Goldman Sachs recommends buying before its February 6th earnings report. Analyst Alexander Blostein points to the company’s “inexpensive fees” as a key driver of its undervaluation. While Carlyle’s management fee growth has been historically modest (around 4% from 2022-2025), Blostein believes accelerating cash flows could fuel share repurchases or strategic acquisitions. This highlights a growing trend in the asset management industry: a focus on efficiency and capital allocation to maximize shareholder value.

The broader asset management sector is benefiting from the long-term trend of wealth accumulation and the increasing demand for diversified investment options. According to a recent report by Cerulli Associates, global assets under management are projected to reach $106 trillion by 2027.

Sneaker Momentum: On Holding’s Growth Trajectory

On Holding (ONON), the Swiss running shoe manufacturer, has also received a positive outlook from Goldman Sachs. Analyst Richard Edwards upgraded the stock to ‘Buy,’ citing strong fourth-quarter data and an accelerating running trend. Edwards also notes that On Holding appeals to a more resilient, high-income consumer base, making it less susceptible to economic downturns. This aligns with a broader trend of consumers prioritizing quality and performance in athletic footwear.

Did you know? The global athletic footwear market is projected to reach $129.9 billion by 2028, growing at a CAGR of 4.8% from 2021 to 2028 (Source: Fortune Business Insights).

Biopharma Innovation: Eli Lilly’s Obesity Market Dominance

Goldman Sachs anticipates any pullbacks in Eli Lilly (LLY) shares will be short-lived, given the company’s leading position in the rapidly expanding obesity market. The potential of drugs like orforglipron further strengthens their outlook. This underscores the significant investment and innovation occurring within the biopharmaceutical sector, particularly in addressing chronic diseases.

The obesity drug market is experiencing explosive growth, with projections estimating it could reach $100 billion in annual sales by 2030 (Source: McKinsey).

The Metaverse Play: Roblox’s Long-Term Potential

Roblox (RBLX), the online gaming platform, is also on Goldman Sachs’ radar. Analysts expect the company to deliver over 20% compounded forward bookings growth and increased user monetization through initiatives like dynamic pricing. This reflects the ongoing evolution of the metaverse and the potential for platforms like Roblox to become central hubs for social interaction and digital commerce.

While the metaverse is still in its early stages, companies like Roblox are laying the groundwork for a future where digital experiences are seamlessly integrated into our daily lives.

Decoding the Underlying Trends

These stock picks reveal several key themes shaping the current investment landscape:

  • Growth in Digital Subscriptions: Spotify exemplifies the continued demand for digital content and the importance of subscription-based business models.
  • Resilient Asset Management: Carlyle Group highlights the stability and potential of the asset management sector, particularly for companies focused on efficient capital allocation.
  • Premiumization in Consumer Goods: On Holding demonstrates the trend of consumers prioritizing quality and performance, even in challenging economic times.
  • Biopharma Innovation: Eli Lilly showcases the significant opportunities in the biopharmaceutical industry, driven by advancements in treating chronic diseases.
  • The Evolving Metaverse: Roblox represents the long-term potential of the metaverse and the platforms that are building the future of digital interaction.

Navigating Earnings Season: A Strategic Approach

Earnings season is a critical period for investors. Goldman Sachs’ recommendations suggest a focus on companies with strong fundamentals, growth potential, and the ability to navigate economic uncertainties. By understanding the underlying trends driving these picks, investors can make more informed decisions and position their portfolios for long-term success.

FAQ

Q: What is a ‘Buy’ rating?
A: A ‘Buy’ rating from an investment bank like Goldman Sachs indicates that their analysts believe the stock is undervalued and has the potential to generate significant returns.

Q: What is CAGR?
A: CAGR stands for Compound Annual Growth Rate. It’s a measure of the average annual growth rate of an investment over a specified period.

Q: Is it safe to invest based solely on analyst recommendations?
A: No. Analyst recommendations should be considered as one piece of information in your overall investment research. It’s important to conduct your own due diligence and consider your own risk tolerance.

Q: Where can I find more information about these companies?
A: You can find more information on each company’s investor relations website: Spotify Investor Relations, Carlyle Group Investor Relations, On Holding Investor Relations, Eli Lilly Investor Relations, Roblox Investor Relations.

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Tech

SoftBank to acquire chip designer Ampere in $6.5 billion deal

by Chief Editor
written by Chief Editor

The Surge of Arm-Based Chip Designs

The tech industry is witnessing a significant shift with the rise of Arm-based chip designs, offering an energy-efficient alternative to traditional x86 architecture used by Intel and AMD. With giants like Amazon Web Services and Microsoft embracing Arm’s architecture, the landscape is transforming rapidly.

Did you know? Arm’s architecture is used in nearly 95% of smartphones globally, making it a familiar player poised to challenge data centers and cloud computing (Source: Arm’s Official Release).

Economic and Technological Impacts

The acquisition of Ampere Computing by SoftBank Group for $6.5 billion signifies a serious commitment to advancing Arm’s presence in high-performance servers. This move could potentially drive down costs for businesses relying on cloud services, democratizing access to powerful computing resources.

SoftBank’s CEO Masayoshi Son emphasizes the importance of this acquisition in fortifying their AI infrastructure investment, signaling a future where AI applications are more efficient and widespread. Companies like Carlyle Group and Oracle selling stakes in Ampere showcase growing industry confidence in this technology (References: SoftBank press release).

Implications for AI and High-Performance Computing

With SoftBank’s acquisition, Ampere’s extensive semiconductor expertise will be integrated into SoftBank’s broader AI innovation strategy. This merger is expected to advance AI applications by providing robust, energy-efficient chips, essential for running complex algorithms.

Pro tip: Investors should monitor Shift events in high-performance computing as they often signal upcoming technological disruptions (Podgio Institute Shift Event Series).

Competitive Landscape

The market is fiercely competitive, with players like Google and NVIDIA investing heavily in AI chip development. SoftBank’s entrée could either catalyze further innovation or nudge incumbents like Intel and AMD to accelerate their own Arm-based projects.

Microsoft’s introduction of Cobalt 100 instances and Amazon’s Graviton chips illustrate the growing demand for power-efficient solutions in cloud computing. This demand reflects broader shifts towards sustainability and efficiency in tech infrastructure (TechCrunch Report article).

Frequently Asked Questions

  • What does Arm-based architecture mean for everyday users? Energy-efficient chips result in faster, more efficient applications and services, leading to potential cost savings for businesses and improved consumer experiences.
  • Why is SoftBank investing in Ampere Computing? To bolster its AI and high-performance computing capabilities, integrating Ampere’s Semiconducting expertise with its broader AI goals.
  • What’s driving the push towards Arm-based chips? Primary drivers include energy efficiency, lower operational costs, and the adaptability of Arm’s architecture for diverse applications in smartphones, servers, and cloud infrastructure.

Future Perspectives

The semiconductor landscape is dynamic, with collaborations and acquisitions shaping the trajectory of technological advancements. As Armstrong-based architectures continue to proliferate, their influence on AI and cloud computing will likely expand, offering new opportunities and challenges across sectors.

Call to Action

As the industry evolves, stay informed on the latest developments in semiconductor technology. Subscribe to our newsletter for the latest industry insights, and join the discussion by commenting below with your thoughts on the future of Arm-based chips.

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