Deutsche Bank upgrades software stocks, sees no evidence of negative impacts from AI on sales this year
“Also, after asking various experts, generalists, Gemini, ChatGPT and Claude, we have still not come across a single Software company that expects a negative revenue effect from AI in 2026,” the strategists wrote.
Deutsche Bank is betting that the nascent turnaround in software stocks is just getting started.
Strategists Maximilian Uleer, Carolin Raab, and Francesca Mazzali wrote:
“Up until the Iran conflict, ‘AI disruption’ caused the European Software sector to fall by 23% and US Software to fall by 19% over the past 6 months. Software companies are trading at historically low premiums versus the market. Current valuations imply that consensus believes that Software companies will no longer outgrow the broader index.
Facts are telling a different story. US Software companies’ earnings were up 29% in Q4 and expectations for 2026 earnings have been revised up. Also, after asking various experts, generalists, Gemini, ChatGPT and Claude, we have still not come across a single Software company that expects a negative revenue effect from AI in 2026.
The narrative has focused on the negative effects on Software while ignoring the positive effects of lower programming costs and potential product improvements due to AI. We think AI disruption worries have peaked. We upgrade Tech from Underweight to Neutral and turn overweight Software within Tech.”
To review:
Yes, software stocks had a solid earnings season. More than 70% of the index that serves as the basis for the iShares Expanded Tech Software ETF reported better-than-expected sales, and nearly 80% beat on the bottom line.
But the idea that no chatbot or expert could come up with an example of a software company whose top line might already be feeling some pressure from AI is ludicrous. (And that might be a bit of a straw man to begin with, as a decent chunk of the bear case is centered on “eventual” rather than “imminent” disruption).
I didn’t even need Gemini to remind me about Workday, which offered soft revenue guidance a couple of weeks ago.
“Workday’s sales growth is constrained by the lack of a meaningful increase in users,” Bloomberg Intelligence analysts Anurag Rana and Andrew Girard wrote. And what’s constraining that “meaningful increase”? A preference to invest in AI tools rather than adding headcount.
There’s a little reading between the lines needed here, but if you expect management teams to bluntly state that it’s barely past breakfast and their lunch is already getting nibbled on, well you might be waiting forev— oh wait, there’s Chegg!
“The new realities of AI and reduced traffic from Google to content publishers have led to a significant decline in Chegg’s traffic and revenue,” per a press release in October that announced Chegg’s restructuring plan.
But from a shorter-term perspective, Deutsche’s analysts have some technicals to help support their fundamental case. The share of software stocks trading above their 50-day moving average has begun to pick up, as has the share no longer trading in oversold territory.
