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!