An in-depth analysis explaining why software companies could deliver high stock market returns in the coming years and why the thesis that artificial intelligence will replace software is largely misunderstood.
Current pessimism often creates the best opportunities
Financial markets rarely operate in a perfectly rational manner in the short term. Cycles of enthusiasm and pessimism follow one another, and it is often these phases of exaggeration that create the best investment opportunities.
The software sector is currently going through one of these periods of disillusionment.
During the decade that followed the 2008 financial crisis, software companies were among the biggest winners in the stock market. The transition to the cloud, the massive digitization of businesses, and the rise of subscription-based models allowed many companies to experience spectacular growth.
However, this dynamic was also accompanied by a classic phenomenon seen in bull markets: excessive valuation expansion.
Some SaaS companies were trading at multiples rarely seen in the history of public markets, sometimes exceeding thirty times annual revenue.
The rapid rise in interest rates and the slowdown in technology growth then triggered a sharp adjustment.
Today, several high-quality software companies are trading at much more reasonable multiples. In some cases, their valuations have returned to levels comparable to those seen before the great technology euphoria.
This type of correction is often the starting point of the next cycles of wealth creation.
Software remains one of the most powerful business models
If software companies have generated such strong returns in the stock market over the past decades, it is not by accident.
Their business model possesses characteristics that are extremely rare in the modern economy.
Unlike traditional industries, software companies have almost no marginal production costs. Once a product is developed, distributing an additional copy requires virtually no additional cost.
This reality translates into exceptionally high gross margins. In many cases, they exceed 80%.
However, the most important advantage of software does not lie solely in its margins.
It lies in the recurring nature of its revenue.
The transition to the SaaS model has transformed the economics of the sector. Instead of selling a one-time license, companies now charge monthly or annual subscriptions.
This transformation creates remarkable visibility into future revenue streams.
Companies generally know how many customers renew their subscriptions, how many increase their usage, and how many leave the platform.
This predictability allows the best companies in the sector to plan their growth with unusual precision.
Switching costs create economic fortresses.
Another fundamental characteristic of software is the presence of extremely high switching costs.
When a company adopts software that is critical to its operations, that software quickly becomes deeply integrated into the organization.
Employees are trained to use it.
Internal processes are built around it.
The company’s data accumulates within it over the years.
Changing platforms then becomes a complex, costly, and risky decision.
This inertia creates a form of economic lock-in that protects software companies from competition.
In some cases, customers may remain loyal to a software product for a decade or more.
For investors, this dynamic is extremely valuable because it transforms revenues into durable and relatively predictable cash flows.
The argument that AI will replace software
One of the main sources of concern in the sector today comes from the spectacular rise of artificial intelligence.
Since the emergence of generative models, some observers claim that AI could make traditional software obsolete.
According to this thesis, users could simply ask an artificial intelligence to perform a task rather than use a specialized application.
This view, although intuitively appealing, rests on an incomplete understanding of how businesses actually operate.
Modern organizations rely on complex digital infrastructures.
Companies must manage their customers, their finances, their employees, their operations, their cybersecurity, and their supply chains.
These activities require structured, reliable, and auditable systems.
In other words, they require software.
Artificial intelligence acts as an additional layer.
In most cases, artificial intelligence does not replace software.
It is added to it.
Companies still need platforms to store their data, structure their processes, and ensure regulatory compliance.
AI acts instead as a layer of automation and analysis that improves these platforms.
A customer relationship management software can integrate an intelligent assistant that analyzes conversations with clients.
Accounting software can use artificial intelligence to automate certain classification tasks.
A cybersecurity tool can analyze massive volumes of data to detect threats.
In each of these cases, AI increases the value of the software rather than replacing it.
Software companies already possess the essential assets.
Major software platforms today possess three assets that are extremely difficult to replicate.
The first is access to data.
Artificial intelligence models become more effective when they are trained on large quantities of real-world data.
Software companies possess precisely this data thanks to their millions of users.
The second is distribution.
Companies that dominate their segment already have a massive customer base.
When they add an AI-based feature, it can be deployed instantly to millions of users.
The third is software infrastructure.
Building a complete platform is extremely complex. Established companies already possess the systems, integrations, and partner networks necessary to deploy new technologies.
These three elements create a significant structural advantage for the incumbents.
Technological history often repeats the same scenario.
Every major technological revolution initially triggers similar fears.
When cloud computing emerged, many observers claimed that traditional software companies would be replaced.
In reality, most of them simply migrated their products to the cloud.
When mobile computing became widespread, some predicted the disappearance of enterprise software.
In reality, the market simply expanded.
Artificial intelligence could follow a similar trajectory.
It does not necessarily destroy existing models.
Instead, it may increase the value of platforms that are already dominant.
Software companies can become compounding machines.
For long-term investors, the best software companies possess a particularly rare characteristic: the ability to compound capital over long periods of time.
When a company combines durable growth, high margins, and high returns on capital, it can reinvest its cash flows at very attractive rates of return.
Some companies have demonstrated that it is possible to sustain this type of dynamic for several decades.
It is this compounding effect that explains the exceptional performance of certain technology companies in the stock market.
Why opportunities are appearing now
The best investment opportunities often appear when the market focuses on a specific risk.
Today, that risk is artificial intelligence.
Some valuations reflect the idea that AI could deeply disrupt the software industry.
However, a deeper analysis suggests that this technology could actually strengthen companies that are already dominant.
Patient investors know that periods of doubt are often the moments when high-quality assets become available at more reasonable prices.
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A transformation rather than a disappearance
Economic history shows that technologies rarely completely eliminate existing industries.
They modify them.
Companies that are able to adapt and integrate these innovations often become even more powerful.
In the case of software, artificial intelligence could act as a value multiplier.
Rather than making software obsolete, it could expand its usefulness and importance in the digital economy.
For investors who are able to look beyond short-term noise, this transformation could represent one of the major opportunities in today’s stock market.
Software has very low marginal costs and high gross margins. Once the product is developed, large-scale distribution becomes highly profitable.
In most cases, AI acts as a feature integrated into existing software rather than as a substitute.
Most software companies today use a subscription model, which creates predictable revenue streams.
After the correction in technology valuations, many investors believe that certain high-quality software companies could offer attractive opportunities for the long term.