Software selloff sparked by AI sets stage for potential big year of M&A, investors say

The year has begun with a sharp decline in cloud software stocks, continuing the trend from 2025. This downturn is paving the way for potential acquisition activity, according to insights shared with CNBC by investors. The WisdomTree Cloud Computing Fund, which monitors cloud software performance, has fallen over 8% in the early days of this year, even as the Nasdaq shows modest gains. Prominent software companies such as Salesforce, ServiceNow, and Adobe have experienced declines exceeding 14%, following a period of significant underperformance. The primary concern among investors is the possibility that artificial intelligence could replace essential components of enterprise software. As IT decision-makers increasingly turn to AI solutions to perform tasks traditionally handled by software vendors, apprehension about the future of these companies is growing. The launch of Anthropic's Cowork, an AI agent tool tailored for enterprise clients, heightened these fears last week. One senior investor, who chose to remain anonymous to discuss the matter freely, indicated that the current upheaval in the software sector could compel several mid-sized firms to seek financial alternatives, potentially leading to a wave of private equity acquisitions. Orlando Bravo, co-founder of Thoma Bravo, a firm focused on software investments, is eager to capitalize on the current market conditions, viewing this as an excellent opportunity to invest in companies developing their own AI solutions. "Incredible buying opportunities are emerging right now," Bravo stated during an interview in Davos, expressing confidence in his firm's ongoing deals and increased activity in the market. Despite this optimism, analysts like Jackson Ader from KeyBanc highlight significant risks within the software industry. Ader's analysis from August identified that companies relying on seat-based applications, such as Monday.com, Asana, and Sprout Social, are particularly vulnerable. Each of these stocks has seen substantial declines, with drops in the double digits this year. In that context, Ader pointed out that these firms lack an established system of record, such as enterprise resource planning (ERP) or customer relationship management (CRM), and have yet to evolve into multi-product platforms. Attempts to reach representatives from Monday, Asana, and Sprout for comments were unsuccessful. Even companies with a stronger product lineup are grappling with market skepticism. Salesforce CEO Marc Benioff has been working diligently to reassure stakeholders of the company's robust position in the AI landscape. In Davos, he claimed that they had achieved their best quarter ever, yet acknowledged the market's reaction, stating, "If you don't produce a large language model, you're evidently not in fashion right now." ServiceNow is also feeling the competitive pressure, recently announcing a partnership with OpenAI to incorporate AI agents for business clients. However, this announcement did little to alleviate investor concerns, as ServiceNow's shares declined for six consecutive days, ultimately dropping 17% in January. Other companies like HubSpot, Atlassian, and Braze have fared even worse, with their shares plummeting over 20%. RBC Capital Markets analyst Rishi Jaluria noted that the current pullback in software stocks might push some businesses to consider "strategic alternatives," warning that deals lacking a strong AI component may struggle to attract investor interest. In a note from late November, Jaluria identified Asana, Box, and DocuSign as potential acquisition candidates, but these companies have also not responded to inquiries. As the tech earnings season approaches, Wall Street is poised to gain insights into how companies are adapting to AI advancements or facing challenges from them. Jaluria emphasized the importance of understanding the timeline for AI agents like Cowork to transition from merely developing new code to automating various stages of the software lifecycle. This timeline will be crucial in assessing the real impact of AI on cloud software companies and the potential repercussions they may face.