Key Points
- The software sector, as measured by the iShares Expanded Tech-Software Sector ETF (IGV), fell 4.6% on Tuesday night (Singapore time), extending year-to-date losses to 17%, making it one of the worst-performing US subsectors this year.
- The core concern is moat erosion over time. As AI coding and agentic tools reduce development friction, switching costs may gradually fall and competitive intensity may rise, compressing long-term pricing power for some incumbents.
- AI is more likely to reshape rather than eliminate the software sector, transforming how software is built, sold and used instead of rendering incumbents obsolete overnight. Many software companies are already integrating AI into their platforms.
- Selective on software. Many high-quality software companies are now trading at a steep discount despite resilient earnings growth.
- Reiterate our “Buy” call on the digital economy sector. Fundamentals of index heavyweights remain intact, with recent earnings supporting revenue and margin resilience.
What Happened
The software sector, as measured by the iShares Expanded Tech-Software Sector ETF (IGV), fell 4.6% on Tuesday night (Singapore time), extending year-to-date losses to 17%, making it one of the worst-performing US subsectors this year.
The move followed Anthropic’s launch of plug-ins for its Claude “Coworker” agent, raising fresh concerns over AI-driven automation across knowledge-intensive software categories. This move sparked concerns over potential AI-driven disruption across the data and professional services industries.
As a result, Toronto-based Thomson Reuters, which owns the Westlaw legal database, slumped nearly 18%, while Britain’s RELX and the Netherlands’ Wolters Kluwer—both providers of legal analytics services—fell 14% and around 13%, respectively. Advertising companies were also under pressure: New York-based Omnicom declined 11.2% at the close, while France’s Publicis shares plunged over 9% following its earnings results. These developments were consistent with our earlier “Neutral” call on the software segment.
Read More: Software: Selectivity Required
Reasons behind the fallout
1) Valuation de-rating. Following the 2022 sell-off, software valuations rebounded as rate expectations turned more supportive in 2024. However, enterprise software spending growth did not re-accelerate meaningfully, reinforcing concerns that multiples had moved ahead of fundamentals..
2) AI disruption. Recent advances in agentic AI have highlighted the potential for workflow automation at materially lower marginal cost, challenging long-duration SaaS pricing assumptions.
|
AI Advancement / Product |
Disrupted / Impacted Software Industry |
|
Claude “Coworker” / Agentic AI |
Professional services, data analytics, knowledge work software |
|
Sora / “Nano Banana” (text-to-video & multimodal gen AI) |
Design, creative, and media software |
|
GitHub Copilot / AI coding agents |
Developer tools & software engineering platforms |
How AI disrupts the software industry
As mentioned in our previous article, AI is disrupting SaaS companies by shifting value from static, subscription-based software toward dynamic, intelligent systems that can reason, automate, and act on behalf of users. Traditional SaaS products rely on predefined workflows and manual inputs, but AI-enabled platforms can generate insights, write code, execute tasks, and continuously improve with data, reducing the need for multiple point solutions.
Why, then, is the market punishing the software industry despite the fact that AI software models have yet to demonstrate a large-scale enterprise replacement use case?
The core concern is moat erosion over time.
In the past, software developers have been one of the software companies’ strongest MOAT, but advances in AI—particularly tools such as Anthropic’s Claude Code and OpenAI’s Codex—enable developers to write code far more quickly, reducing differentiation and dampening pricing power.
As AI coding and agentic tools reduce development friction, switching costs may gradually fall and competitive intensity may rise, compressing long-term pricing power for some incumbents.
The sell-off appears overdone, opening a window for bargain hunting
While AI-related disruption risks are real, we believe the current sell-off is overdone, creating opportunities to accumulate high-quality software companies.
High Switching Cost: For corporate customers, switching from established software platforms to standalone AI models entails high practical switching costs, even if AI tools appear cheaper or more capable. Enterprise software is deeply embedded in workflows, data architectures, compliance processes and employee habits—often developed over many years through customisation, integrations and governance frameworks.
Replacing these systems would require data migration, model training and fine-tuning, security validation, regulatory approval and large-scale retraining, all while risking operational disruption.
Reshape; Not Eliminate: AI is more likely to reshape rather than eliminate the software sector, transforming how software is built, sold and used instead of rendering incumbents obsolete overnight. Many software companies are already integrating AI into their platforms.
For example, ServiceNow’s Now Assist has surpassed USD 600 million in net new annual contract value (ACV) and is tracking towards a USD 1 billion run rate by 2026, becoming a meaningful driver of subscription revenue. Salesforce’s Agentforce and related platforms have also reported a 120% year-on-year increase in ARR from its Data Cloud + AI segment.
Room for valuation re-rating: Following the sell-off, the software sector, as measured by IGV, is trading at 32x forward P/E and 17.1x 2028 forward P/E, representing a meaningful discount to its historical average forward P/E of 38x, despite expectations of double-digit earnings growth.
While some de-rating is warranted given AI uncertainty, we estimate a more conservative fair multiple of 30x, similar to the fair P/E for broader digital economy sector.
Upside will ultimately depend more on earnings durability than multiple re-expansion alone. All this, still implies upside potential of around 75% by 2028.
Table 1: Valuation for iShares Expanded Tech-Software Sector ETF
|
|
2025 |
2026F |
2027F |
2028F |
|
Price/Earnings |
38.07 |
20.56 |
20.33 |
17.14 |
|
Sales |
105.45 |
125.13 |
143.61 |
164.96 |
|
Growth (YoY) |
13.21 |
18.66 |
14.78 |
14.86 |
|
Earnings |
26.91 |
40.24 |
40.69 |
48.28 |
|
Growth (YoY) |
13.93 |
49.56 |
1.12 |
18.64 |
|
Fair P/E |
|
|
|
30 |
|
Upside Potential |
|
|
|
75% |
|
Target Price |
|
|
|
138 |
|
Source: Bloomberg Finance L.P., iFAST compilations. Data as of 4 Feb 2026. |
||||
Our View – Selective on Software
While AI disruption risks are valid, many high-quality software companies are now trading at a steep discount despite resilient earnings growth.
We view the current sell off as primarily sentiment-driven rather than fundamental deterioration, creating selective opportunity in durable profit leaders.
It is also important to note that as current focus of the market have shifted to AI infrastructure beneficiaries and sectors outside of digital economy, short-term volatility is likely to persist and software valuations may remain compressed for longer, required disciplined rsizing and selectivity.
Digital Economy (Buy): The broader digital economy sector has also been affected by the recent sell-off. However, fundamentals of index heavyweights remain intact, with recent earnings supporting revenue and margin resilience.
As such, we reiterate our “Buy” call on the digital economy sector.
Declaration:
This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.