AI disruption: Do opportunities for contrarian purchasing arise from the software selloff?

The software stock market is experiencing a selloff due to advancements in artificial intelligence (AI) We ask which stocks can withstand this disruption and where you should invest to make money

Investors fearing an existential threat to their business models are selling off software stocks quickly.

Though the technology is currently unsettling the markets, artificial intelligence (AI) stocks have long provided equity investors with impressive returns.

Developers of AI frontier models, such as Anthropic, have released a number of products in recent weeks that could allow for the quick and low-human-input creation of whole applications for tasks like legal analysis.

These kinds of apps were previously the purview of the extremely lucrative software-as-a-service (SaaS) industry. However, investors are now worried about whether models like these can endure if companies can just give Claude (Anthropics chatbot) a few prompts and create their own substitute at a low cost.

The selloff has been significant. Between the beginning of the year and February 23, when the SandP 500 has been trading flat, the Nasdaq 100, which is dominated by technology stocks, dropped 3%. During that time, the SaaS stock Shopify (NASDAQ:SHOP) dropped 27%, causing software stocks to plunge into a sort of AI-driven apocalypse.

As AI advancements reverberate across industries, the current market environment is causing a wave of disruption, according to Alex Wright, portfolio manager for Fidelity Special Values Trust (LON:FSV).

However, Wright notes that opportunities are created by this general pessimism, particularly for contrarian investors.

A few stock classes and industries seem to be comparatively protected. This year, US small-cap stocks have outperformed their larger counterparts, and there are indications that the country's macroeconomic environment is favorable for them moving forward.

What other industries and stocks might withstand the disruption caused by AI? Has the selloff made it possible to purchase some oversold stocks?

The significance of value.

According to Wright, this is the most opportunistic period in the markets since the Covid-19 pandemic because of the disruption brought on by AI concerns.

He claims that "many high-quality companies traded at deeply depressed valuations even as fundamentals began to stabilise" at that time.

According to Wright, the uncertainty surrounding the winners and losers that AI will produce tilts the markets in favor of value investors, much like the disruption caused by COVID.

SaaS stocks have been severely impacted by the AI disruption in part because, during the past ten or so years, their large profit margins have persuaded investors that they could continue to grow their profits virtually forever.

Price to earnings (P/E) ratios and other fundamental valuations became higher as a result. Any developments that cast doubt on the perpetual growth thesis at that point may cause share prices to drop rather quickly.

Wright stated, "There is little margin for error when companies trade on rich multiples." A significant de-rating can be justified by even a slight change in the competitive landscape, such as the possibility of disruption from artificial intelligence, when investors believe a company's monopoly advantage will last. A "

The fact that many SaaS stocks are still fairly pricey in spite of the recent selloff is noteworthy. Shopify's trailing P/E ratio is still above 80, which means that its stock is significantly more expensive than Nvidia shares. The trailing P/E for ServiceNows (NYSE:NOW) exceeds 100.

The market obviously doesn't think (yet) that these SaaS stocks will vanish in the near future, only that their margins might face greater pressure in the years to come than they have thus far.

It is more difficult to forecast how AI will affect these stocks in the long run. However, Wright notes that the benefit of purchasing value stocks is that you don't have to plan that far in advance.

"We don't need to make a firm decision about the outlook for the next ten years because of the low valuation multiples we pay for stocks," he stated.

Will Salesforce emerge victorious in AI?

Salesforce (NYSE:CRM) is one of the SaaS stocks that best represents the AI disruption selloff. During the previous 12 months, Salesforce's stock dropped 42.1% and 32.7% from 2026 to February 23.

As the technology develops, markets worry that its CRM software is exactly the kind of product that AI tools could replace. It has also historically been seen as one of the classic SaaS stocks, which makes it especially vulnerable to the most recent wave of pessimism.

However, Dan Ives, head of global technology research at Wedbush Securities, an investment bank, thinks the Salesforce selloff is exaggerated.

Ives commented that AI's "potential to monetise its vast installed base of over 150,000 customers is high" in advance of the company's earnings release on February 25, which is anticipated to see chair, CEO, and co-founder Marc Benioff address the threat that many believe AI poses to Salesforce. The "

Ives continued, "these clients, which comprise 90% of the Fortune 500, have spent decades codifying their business logic and organizing their data within the Salesforce ecosystem." Ives thinks that generic AI models are unable to replicate the unique context and data that this produces.

Ives stated, "We think that Salesforce is still a long-term winner of the AI revolution despite the company finding itself in the epicenter of the software sell-off, as we think the market is overlooking key details about Salesforce's differentiated position against the negative AI Ghost trade overhang."

As early as 2014, Benioff turned Salesforce into an AI company, and it has incorporated AI into many aspects of its product line, including its Agentforce agentic AI product.

Salesforce CEO Marc Benioff (R) and Nvidia CEO Jensen Huang (L) converse onstage at Salesforce's Dreamforce on September 17, 2024, in San Francisco, California.

Marc Benioff, CEO, chair, and co-founder of Salesforce, addressing Jensen Huang, CEO of Nvidia, during Salesforce's Dreamforce event in 2024. Salesforce was caught up in the recent SaaS selloff due to concerns about AI disruption, despite Benioff's long-standing efforts to reposition Salesforce as an AI company.

Avoid the AI selloff by investing in contrarian stocks.

In the current market, picking SaaS winners is not for the faint of heart, especially since they continue to trade at high multiples (although Salesforce appears more affordable than Shopify or ServiceNow at only 35 times trailing earnings).

Wright identifies a few other industries that were unfairly affected by the AI disruption selloff but now appear to be very reasonably priced.

He enjoys working for staffing firms like Sthree (LON:STEM), Hays (LON:HAS), and Page Group (LON:PAGE).

"Long before AI emerged, investors saw staffers as susceptible to disintermediation," Wright said. Fears have increased in recent years due to worries about automation and job displacement. Nevertheless, there is currently no conclusive proof that AI has negatively impacted these companies' structural viability. A "

In a similar vein, Wright believes that the selloff has been "increasingly irrational" for wealth managers. He notes that "long endured disintermediation fears from robo-advice and lower-cost alternatives without having meaningful effects" have affected the industry. An example pick is St. James Place (LON:STJ), which is presently trading below 14 times trailing earnings.