The lesson from the major collapse of American software stocks: At least for now, AI is a substitute for software, not a gain!

Driven by the strong momentum of the artificial intelligence boom, the technology industry is currently undergoing an unprecedented and intense reshuffle. This week, the financial reports of software and enterprise technology companies have exposed the pains of this turning point - with generally weak performance and uncertain prospects.

Software companies are still a long way from profiting from the AI boom

Analysts point out that the current AI investment frenzy has mainly driven demand for chip manufacturing and cloud computing, while software companies are still a long way from profiting from it.

Anurag Rana, a senior analyst at Bloomberg Intelligence, stated that apart from Microsoft, very few software companies have seen a boost in revenue, with funds mainly flowing to chip giants like NVIDIA and cloud computing platforms.

Most companies do not have a dedicated AI budget, so they can only reallocate funds from non-AI budgets. They are still buying NVIDIA chips and Dell servers, but they are not signing large software contracts. The software industry will eventually benefit from AI, but it may take several years to establish, and any improvement in performance in the second half of this year is unlikely to materialize.

Once a shining star in the industry, Salesforce saw its stock price plummet by nearly 20% after its earnings report on Thursday, marking the largest single-day drop since its listing in 2004. While poor performance was a trigger, the statements from the company's executives highlight the dilemma faced by software companies.

Salesforce CEO Benioff bluntly stated that the "false prosperity" brought about by the pandemic is fading. The hardware and software purchased in large quantities to adapt to remote work needs are now in urgent need of integration and streamlining.

He believes:

Every enterprise software company has made adjustments after the pandemic, and companies that recently released financial reports are basically repeating the same things in different ways.

In addition to Salesforce, companies like Okta, MongoDB, and UiPath have also lowered their full-year revenue expectations in their latest financial reports. Okta specifically pointed to the macroeconomic environment as a drag, affecting the acquisition of new customers and the expansion of existing customers.

During Veeva's earnings conference call, the CEO even listed general AI as a major reason for the "re-prioritization of customer rights." A similar scene has almost engulfed the entire software and enterprise technology industry.

Downturn in the macro environment, with major corporate funds flowing into hardware upgrades

Another potential obstacle is the continued downturn in the macro economy. The latest PCE price index data released this week showed that inflation levels were slightly higher than expected, and the Federal Reserve kept interest rates at a 23-year high. In this environment, the enthusiasm of enterprises for signing long-term software orders naturally takes a big hit.

Daniel Dines, the founder of UiPath, pointed out that UiPath experienced a severe business slowdown in late March and April, partly due to the current weak economic conditions, with customers significantly cooling on annual contract demands and instead favoring short-term orders.

Dell's financial report also showed that due to an influx of more low-profit AI server orders, the full-year gross margin is expected to decline by 150 basis points. This indirectly indicates the situation where software demand is weak and business budgets are shifting more towards hardware Overall, behind the hot development of AI, the technology industry is accelerating its differentiation and restructuring. Areas directly related to chips, cloud computing, etc., are reaping the greatest profits, while software companies are facing significant challenges, having to respond by cutting expenses, slowing expansion, or even laying off employees.

For example, SentinelOne's CEO bluntly stated that enterprise procurement habits and software evaluation standards are changing. This shift in momentum is a major test for the entire software industry. Once they deviate from the AI trend and miss the opportunity, the consequences could be falling behind in the industry reshuffle.

However, some analysts believe that the significant pullback in software stocks at present actually provides investors with opportunities. Bernstein analysts believe that top companies with high profit certainty like ServiceNow may become more attractive for investment after valuation adjustments