⚡️ Finding AI resilient barriers to entry
In recent weeks, a number of software companies have seen their share prices drop significantly in response to fears that their products may be rendered redundant by AI. This is in response to the fear that low-cost (and sometimes even free) large language models (LLMs) having the potential to replace the functions previously carried out by even advanced software. AI also lowers the barrier to entry for the creation of new applications, meaning software companies are set to face increased competition.
Consequently, software companies have seen significant drops in their share prices, as the year to date (YTD) returns below show:
- Microsoft: -15%
- Fair Isaac: -18%
- Autodesk: -19%
- Adobe: -21%
- Veeva Systems: -21%
- ATOSS Software: -24%
- Salesforce: -25%
- Nemetschek: -26%
- Constellation Software: -27%
- ServiceNow: -27%
- TechnologyOne: -28%
- Intuit: -37%
- WiseTech Global: -38%
- Pro Medicus: -47%
Those running to the software sector's defence often argue that while AI may mean more competitors, however companies benefiting from switching costs should be protected from the risk that their customers jump to a cheaper alternative.
It's worth pausing here quickly to set out how I personally analyse competitive threats.