According to The Wall Street Journal, software stocks including Salesforce, Adobe, and ServiceNow have all declined by at least 30% since the start of 2023. An S&P index of small and midsize software stocks is also down over 20% in that period, with declines accelerating this month after Anthropic introduced its Claude Code AI tool. The sector is being rocked by the emergence of “vibe coding,” where AI tools rapidly produce apps, leading investors to question if AI spells the death of traditional software. Analyst Rishi Jaluria notes the narrative has shifted from software companies benefiting from AI to facing a fundamental threat. This slump comes as 13 software companies have defaulted on syndicated loans in the past two years, a previously rare event, according to PitchBook LCD data.
From World Eater to Eaten
It’s a stunning reversal. Just a few years ago, software was the undisputed king. It was the sector “eating the world,” fueled by cloud computing and the pandemic’s remote work boom. Wall Street loved the predictable, sticky revenue from multiyear subscriptions. It seemed like the perfect business model. But here’s the thing: nothing lasts forever. The rate hikes starting in 2022 exposed the sector’s leverage, and the return to the office softened demand. Now, AI isn’t just another feature—it’s a potential disruptor that’s making investors rethink everything.
The Debt Binge Hangover
And let’s not forget the debt. The article highlights a crucial, under-discussed angle: the credit boom that fueled private-equity buyouts in software is showing cracks. The fact that 13 companies have defaulted in two years is a big deal in a sector where defaults were “practically unheard of.” Look at the case of Quest (OneLogin), bought with $3.6 billion in loans only to buckle under that debt and competition. Investors like Vince Flanagan are now scrutinizing these names “much more closely.” Basically, the easy money era is over, and the bill is coming due for over-leveraged players who can’t adapt.
AI’s Real Threat: Not Obsoletion, But Commoditization
So, is AI going to wipe out Salesforce or Adobe tomorrow? Probably not. The more insidious risk, as Jaluria points out, is the erosion of pricing power and growth. If companies can build more in-house with AI or find cheaper, AI-native alternatives, why would they keep paying 20% more for annual maintenance and updates? The threat is to the “fat, lazy incumbents,” as he bluntly puts it. AI could turn complex software from a specialized, high-margin product into more of a commodity. That’s a terrifying prospect for investors banking on endless growth.
A New Era of Investor Skepticism
Now, the uncertainty is spilling over into the AI funding boom itself. Debt investors, burned by software’s leverage, are forcing companies like Meta and Oracle to pay up for bonds to fund AI infrastructure. They’re asking the hard questions: “Are these investments sustainable? Are they going to be profitable?” This isn’t blind euphoria anymore. The software slump is serving as a cautionary tale. It’s a reminder that on Wall Street, today’s indispensable platform can quickly become tomorrow’s legacy cost center. The hype cycle giveth, and the hype cycle taketh away.
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