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*( I think that even if you on the opposite side of the trade, it is good to read on how others are thinking about what is going on. I am just sharing what came in the mail )*
Software Stocks: Are Investors Worrying Too Much About AI Disruption?
Many stocks with strong competitive advantages have been caught up in the selloff and are now undervalued.
Michael Field, CFA
12 Feb 2026
[ https://global.morningstar.com/en-gb/markets/software-stocks-are-investors-worrying-too-much-about-ai-disruption ](https://global.morningstar.com/en-gb/markets/software-stocks-are-investors-worrying-too-much-about-ai-disruption)
**Key Takeaways**
* Shares in ‘hyperscalers’ like Microsoft, Amazon and Meta have sold off over fears about AI spending.
* Investors worry that companies with valuable databases like RELX and Thomson Reuters are now vulnerable to AI disruption.
* But switching costs are key to these companies’ wide economic moats.
There were several AI-induced selloffs last year, but the one at the start of February was different. This time it didn’t just affect the Magnificent Seven, and anything adjacent to the big company tech stocks. Even European stocks like Wolters Kluwer WKL or RELX REL that straddle the line between tech and business services were caught up in the crash.
**What’s Behind the US Tech Selloff?**
Microsoft MSFT, Meta Platforms META and Amazon AMZN, the “hyperscalers,” have announced increased capex spending, some 60% higher on aggregate in 2026. But this has been met with caution from investors. Solid earnings results aside, it seems many investors believe that continuing to scale up at this rate is akin to upping the ante at a poker card table. While they may have been happy with the level of capex investment 12 months ago, and the expected payback time, the bet is too rich for them now.
AI and disruption are words we hear a lot, so when AI firm Anthropic released a legal plug-in for their large language model, Claude, for the software industry the risk felt all too real.
Many of these firms’ business models essentially depend on extracting rich operating margins from databases they have created over the years. The fact that AI can now generate these quickly and easily, and gives clients AI tools to create these databases themselves, at a lower cost and in a more bespoke manner, leaves the likes of Thomson Reuters TRI, RELX and Wolters Kluwer looking increasingly vulnerable.
But the fear doesn’t start and end with these names. If Anthropic can release a legal plug-in that sent shockwaves through the industry, there are other software/services areas that can be shaken
|**Name**|**Ticker**|**Star Rating**|**Economic Moat**|**YTD Return (%)**|
|:-|:-|:-|:-|:-|
|Oracle|ORCL|4/5|Wide|−19.11|
|Workday|WDAY|5/5|Wide|−32.70|
|Zscaler|ZS|5/5|Narrow|−23.97|
|Datadog|DDOG|4/5|Wide|−6.37|
|Adyen|ADYEN|4/5|Wide|−15.91|
|Salesforce|CRM|5/5|Wide|−30.16|
|RELX|REL|5/5|Wide|−33.34|
|Thomson Reuters|TRI|5/5|Wide|−32.37|
|Wolters Kluwer|WKL|5/5|Wide|−29.43|
|SAP|SAP|5/5|Wide|−18.89|
Many of these firms’ business models essentially depend on extracting rich operating margins from databases they have created over the years. The fact that AI can now generate these quickly and easily, and gives clients AI tools to create these databases themselves, at a lower cost and in a more bespoke manner, leaves the likes of Thomson Reuters TRI, RELX and Wolters Kluwer looking increasingly vulnerable.
But the fear doesn’t start and end with these names. If Anthropic can release a legal plug-in that sent shockwaves through the industry, there are other software/services areas that can be shaken
**Which Software Firms Are Being Disrupted?**
There is, as yet, very little evidence to suggest that AI disruption has already occurred in the sector.
Revenue growth for firms definitely slowed in 2025 and many investors are taking this as confirmation that AI has already disrupted the industry, which induced a selloff and subsequent underperformance of the sector, particularly in Europe where most of our tech names are in the software space.
However, slower sales tell us one thing only—that these firms are selling less, which they blamed on clients delaying purchases. There could be many reasons for this, such as trying to do more with less, or because clients are taking a wait-and-see approach; on the off chance that AI does come through with the goods.
The fears also don’t bear out for many firms in terms of earnings. Thomson Reuters, reporting Q4 numbers on Feb. 5 said it is expecting organic revenue growth of around 8% in 2026, alongside operating margin improvement of 100 basis points. Similarly, Microsoft saw revenue up 15% year over year in the fourth quarter, while SAP SAP saw cloud backlog growing at more than 20%, with total revenue up 10%.
That’s not to say there’s nothing negative happening out there. US listed Gartner IT, a consulting firm that provides a variety of services, saw its stock fall by 30% on Feb. 3. It beat Q4 revenue and earnings estimates, but the company forecast zero growth in 2026, on the back of a “much tougher selling environment.”
From everything we’ve seen so far, particularly from service firms, retention rates are as high as ever, meaning clients have not shifted purchases elsewhere or stopped purchasing entirely, they’ve simply slowed their buying.
**Why Hyperscalers Have Economic Moats**
In the face of existential fears for stocks and sectors, it’s important to step back and assess how well these areas are protected by competitive advantages, and if they can deal with any challenges thrown at them.
Dealing with the hyperscalers first, almost all stocks here are designated wide moat by our analysts. This means Morningstar analysts believe these companies can generate outsize returns for at least 20 years into the future, which is a very high bar.
Stocks like this wouldn’t achieve this rating unless these analysts were confident about the robustness of their business models, even in a fast-changing business environment.
There are many different justifications for these wide moat ratings, including intangible assets, switching costs, and the network effect. There are also factors which could be augmented by further investment in AI. In the case of Meta Platforms, Morningstar analysis points to improved returns from its ad tech business and a way to put distance between itself and competitors, with the right investment.
However, there are risks. The lack of a clear monetization strategy around some of the recently announced capex investment is a concern for us, as well as the market. The caveat here being that recent falls have created a greater margin of safety for investors looking to get exposure to the AI theme.
**Switching Costs Are Key to Economic Moats**
Most of the software/services names companies we cover in this space also command wide moat ratings. For these companies, switching costs is a very common theme. There is a reason client retention rates are so high for many of these companies:
* In many instances there are few other options for clients who need the data/services they provide.
* It can take significant training for staff at client firms to get up to speed with their systems.
* Switching to another provider or indeed building tools in-house can come at an enormous cost and effort, if it is even possible.
This isn’t to say that AI won’t disrupt some business models. Investors are right to be cautious. The applications of “vibe coding”, an AI-assisted software development approach, will likely be felt by many firms and products in the sector. We just don’t believe that the market selloff that has hit the entire sector. Many firms we cover are sufficiently protected from the worst of the effects.
RELX and Thomson Reuters, which have large legal businesses, are good examples as their shares have taken a big hit recently. Their businesses center on legal research, areas that rely on databases that have taken decades to build and depend on public and privately held information, much of which needs to be paid to access.
|**Name**|**Ticker**|**Star Rating**|**Economic Moat**|**YTD Return (%)**|
|:-|:-|:-|:-|:-|
|Microsoft|MSFT|5/5|Wide|−16.39|
|Amazon|AMZN|4/5|Wide|−11.58|
|Meta|META|4/5|Wide|−0.09|
**Opportunities in the Tech Sector**
We see opportunity in the tech space as too good to ignore. In Europe tech is now one of the cheapest sectors in the region, trading at an aggregate 6% discount to our fair value estimate, in a fairly valued market.
We believe the majority of the Mag 7 stocks are attractive currently, particularly the ones related to the AI theme. Among the hyperscalers, Meta, Microsoft, Amazon, are all either 4 or 5- star stocks, meaning they are very attractive right now.
In the software space the opportunities are even more plentiful. We see attractive stocks on both sides of the Atlantic, in the form of SAP, RELX and Adyen in Europe, and Thomson Reuters, Salesforce and Workday in the US.
FIN