The Software Reckoning: Adapt to AI or Die (Buy FIG, SHOP, CRM)

Technology Comes Full Circle

“Software is eating the world!” ~ Marc Andreessen

In 2011, Marc Andreessen, one of the world’s top venture capitalists (and an early investor in companies such as Stripe, Waymo, & Anduril, to name a few), famously and correctly proclaimed that “Software is eating the world.” Andreessen’s bold prediction was based on the fact that software was upending traditional business, was becoming a foundational component for both business and modern life, and how these companies were undervalued at the time.

Will AI Lead to the Death of Software?

“The most ironic outcome is the most likely.” ~ Elon Musk

In a twist of irony, the artificial intelligence revolution has led Wall Street to come full circle and begin to question whether AI will disrupt or “eat” software, just as software did to other businesses more than a decade ago. As always, investors should examine history to generate the most informed insights as history tends to repeat itself – especially on Wall Street.

Technology: Disrupt or be Disrupted

“You adapt, evolve, compete, or die.” ~ Paul Tudor Jones

Historical precedents teach us that the answer to the AI software question is unlikely to be a blanket one. Instead, the companies that fail or are slow to adapt to or integrate AI technology will fail, while those that do will succeed. Below are three examples of companies that failed to adapt to disruptive technology:

1.       Blockbuster Video: In the late 1990s, Blockbuster dominated the video rental business. However, instead of embracing new technology (the DVD & later streaming), Blockbuster went bust. To add insult to injury, Blockbuster’s management team famously and ignorantly declined an offer to buy Netflix (NFLX) for $50 million. Today, Netflix is worth $500 billion.

2.       Borders Group: Like Blockbuster, the bookseller’s lack of foresight and initiative led to its demise. Instead of embracing the internet, Borders refused to move beyond its brick-and-mortar locations, which ultimately led to its bankruptcy. Ultimately, Amazon (AMZN) disrupted the brick-and-mortar book market with its Kindle and e-commerce store for physical books. Though Amazon remains the dominant industry player today, it’s worth noting that Barnes & Noble (which was a direct Borders competitor) was able to survive by embracing e-commerce.

3.       Kodak: While Kodak was among the first to invent digital cameras, management foolishly suppressed in-house technological innovations, fearing that such innovations would cannibalize its legacy, highly profitable film business.

Regardless of the era or the technology, countless other examples exist. It should be abundantly clear to investors that embracing technology, taking risks, and being open-minded are integral to success.

3 Software Companies Embracing AI

Shopify Lands E-commerce Deal with OpenAI

Though private, OpenAI is arguably the most important company on Earth currently. For instance, Advanced Micro Devices (AMD) surged 43% this week after securing a deal with the ChatGPT parent company. In software, Shopify (SHOP) gained more than 6% earlier this week after signing an agreement with OpenAI. Shopify operates a leading e-commerce platform that allows its customers to start, scale, market, and manage an online business.

In the terms of the deal, Shopify will integrate with ChatGPT to allow chatbot users to discover and purchase products directly within a ChatGPT conversation, essentially creating a new business. Shopify’s collaboration with the fastest-growing application essentially creates a new way to shop online, ensuring that Shopify continues to reach a vast audience. Unlike software laggards, Wall Street analysts anticipate that Shopify will generate double-digit revenue growth for the foreseeable future.

Figma: Changing the Way Digital Products are Created

Figma’s (FIG) flagship product is a web-based interface that helps designers, product managers, and developers collaborate and create digital products. Investors can imagine Figma as Microsoft (MSFT) Teams, but for designers.

Figma is another company fortunate enough to partner with OpenAI. Earlier this week, OpenAI CEO Sam Altman announced that Figma users will be able to prompt Figma-related actions directly with ChatGPT. Like the Barnes & Noble example discussed earlier, the Figma partnership is an example embracing new technology, not shying away from it.

Technically speaking, FIG, which went public in late July, is forming the right-hand side of a classic IPO U-turn base structure.

Salesforce: Leveraging AI to Become More Efficient

Salesforce (CRM) is the leading provider of on-demand Customer Relationship Management (CRM) software, which enables organizations to better manage critical operations, such as sales force automation, customer service and support, analytics, and marketing automation.

When asked about potential AI disruption of CRM’s business, CRM CEO Marc Benioff provided an intriguing counterargument. Benioff revealed that, due to human limitations, Salesforce left over 100 million sales leads unattended. Because CRM’s in-house AI makes salespeople far more efficient, Salesforce can address more leads with fewer employees, thus increasing revenue while decreasing costs. Though AI disruption fears have led to sluggish price action, CRM shares are tagging the long-term 200-week moving average, a level that the stock has found support at numerous times over the past 15 years.

Bottom Line

The cycle of disruption is a constant in the technology world, and the rise of AI presents the latest test for the software industry. As history repeatedly shows, the companies that thrive will embrace and integrate new technology – not run from it.

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