AI Threat: Are Top Software Stocks Now Undervalued?

Summary

Software stocks like Adobe, Salesforce, and Intuit have seen significant drops, with Adobe down 50%, Salesforce 45%, and Intuit 67% from their peaks. This decline raises the question of whether these stocks are now cheap or if artificial intelligence fundamentally threatens their business models. While these companies are recognized for their AI relevance, with Salesforce, Adobe, and Intuit ranking high on lists of AI-related stocks, their valuations suggest they could be AI victims. The market has broadly divided tech into AI winners and others, placing traditional software companies, even profitable ones, into the latter category. This situation presents a potential opportunity if the market is overreacting, or a warning if their business models are indeed broken. A key factor is the revenue multiples, now around 3x, half of recent private market transactions. If these companies can control expenses and continue growing, their earnings multiples could be very modest. The core fear is AI-related disruption impacting their competitive moats. Adobe's situation is characterized by strong financials but investor concern over pricing power as AI tools potentially commoditize creative work. Salesforce faces questions about its subscription-based model's survival against AI agents. Intuit, despite strong profitability, is facing AI disruption risk for its consumer tax software, TurboTax. Ultimately, Adobe is ranked as the most interesting due to its extreme valuation, Salesforce as second most interesting due to its market position and buybacks, and Intuit third, despite its quality, due to clear consumer AI disruption risk.