Michael Luke: Milford Asset Management expert on software stocks plunging

Software stocks have taken a dive, and it's prompted concern among economists.

This follows a difficult month for the sector, with many of them seeing their shares drop by 40 percent as a result of AI.

Milford Asset Management's Michael Luke explained further.

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Episode Transcript

Speaker 1 (00:09):
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Speaker 2 (00:16):
Milford Asset Management Luke. Michael Luke is with US high Michael.

Speaker 3 (00:21):
Hey ever, how's it going you?

Speaker 2 (00:22):
Very good?

Speaker 3 (00:22):
Thank you?

Speaker 2 (00:23):
Now, see the software shares have been hammered overnight in
the US and then locally today. What's been going on?

Speaker 3 (00:28):
Yeah, it's been a tough day and a month early
for the software sector. Now the falls today follow and Froperk,
the company behind the AI model, Claud releasing new AI tools,
including a legal plug and aimed at automating some legal work.
This saw companies like Thompson Reuters, which is a major
legal software provider, fall fifteen percent overnight. All other software

(00:49):
companies like Salesforce selves foul seven percent, and locally, we
weren't spared either of zero share price falling fifteen percent today.
The share price of many of these software companies have
now fallen up to forty percent over the past few months,
which is a pretty staggering move.

Speaker 2 (01:04):
Really, why is it that the software companies have fallen
so much? Reas because I thought AI was supposed to
be good for these businesses.

Speaker 3 (01:12):
Yeah, that's a really interesting shift that we've seen in
and investor sentiments. Where last year many of these software
companies were actually meant to be AI beneficiaries, using AI
to make writing code cheaper as well as selling new
features to their customers. Well, now they're directly in the
firing line where there's a big growing debate over whether
AI coding assistance likechlored code will actually disrupt software and

(01:35):
actually enable new competitors, including potentially allowing companies to write
their own software internally instead of buying it from existing providers.
So the narrative is completely flipped from software companies being
a beneficiary to now being potential victims.

Speaker 2 (01:50):
Do you think AI will actually disrupt these software businesses?

Speaker 3 (01:54):
Lurk Well, I think a big part of the reason
these software companies have fallen so much is that it's
actually a really hard narrative to complete completely disprove, where
the question is how good are these AI tools going
to be in the future, and protecting the future is hard. Now.
Some of these software companies were also trading at very
high valuations previously, so they will be impacted by changes

(02:16):
and long term growth assumptions. But there are a few
things that are aware. Remembering, Firstly, when you're buying software
from the likes of a zero or Salesforce, you're not
just buying the code. You're getting a company to make
it run for you, stay updated, maintain high security, and
often deliver a number of data integrations and compliance features
which can be really difficult to replicate. Secondly, it can

(02:40):
also be very painful to switch software providers when it
comes to moving all your data, your workflows, your customer integrations,
as well as learning to use the new system. So
there has to be a really compelling reason to shift
if you're existing software is working pretty well and not
breaking the bank. That said, these tools like Claude will
keep getting better and could enable more competition over time.

Speaker 2 (03:03):
Now, is this do you think than a buying opportunity?

Speaker 3 (03:06):
That's the big question. And then we have seen a
big reaction and likely a very big overreaction for a
number of companies out there. So there will be some
great opportunities, but investors there need to be selective as
there likely will be some companies disrupted, even if it's
just as slowdown and growth, and we've seen pretty large
negative share price reactions to recent software company results. Like

(03:29):
Microsoft and SAP with growth missed investor expectations. So it's
all about finding the right investment. Where the shear marketers
may be overreacted to the risks of AI disruption, We're
trying to avoid those companies where they actually are really risks,
and maybe those risks are still underpriced.

Speaker 2 (03:46):
Michael, it's good to talk to you. Thanks for running
us through at Michael Luke, NOFIT Asset Management.

Speaker 1 (03:51):
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