AI fears pummel software stocks: Is it 'illogical' panic or a SaaS apocalypse?

The software sector faced renewed market concerns this week after artificial intelligence company Anthropic released new AI tools, triggering a sell-off in software-as-a-service and data provider stocks. 

Anthropic's new AI tools, built for its Claude "Cowork" AI agent, are designed to handle complex professional workflows that many software and data providers sell as core products.

The tools and other similar AI agents target functions ranging from legal and technology research, customer relationship management and analytics. That has raised concerns that AI could undercut traditional software business models.

The S&P 500 Software & Services Index, which has 140 constituents, fell over 4% on Thursday, extending its losing streak to eight sessions. The index is down about 20% so far this year.

Shares of Thomson Reuters, Salesforce and LegalZoom were among the hardest hit in U.S. trading this week, with the sell-off spreading to Asian IT firms Tata Consultancy Services and Infosys.

Despite the market jitters, analysts and tech executives remain divided on the long-term impact of these AI tools on these industries.

Among tech leaders downplaying market concerns that AI will replace enterprise software is Nvidia CEO Jensen Huang.

"There's this notion that the software industry is in decline and will be replaced by AI," he said at an event on Wednesday. "It is the most illogical thing in the world."

The influential tech leader instead argued that AI will use and enhance existing software tools rather than completely reinventing them.

Rene Haas, CEO of British chip designer Arm Holdings, echoed that sentiment this week, arguing during an earnings call that enterprise AI deployment is still in its early days and not yet massively transformative.

Haas described recent market fears as "micro-hysteria" in comments to the Financial Times.  

Still, concerns about the software sector predate the latest sell-offs. Hedge funds have already shorted about $24 billion in software stocks this year as of Wednesday. Short sellers borrow shares, sell them and aim to buy them back later at a lower price for a profit.

Meanwhile, Anthropic on Thursday launched what it called an improved AI model, ‌coming just days after its latest Claude tools spooked investors.

While many tech analysts have increasingly warned that AI is going "to eat" software over the long term, views on that risk and the latest sell-off in software stocks remain mixed.

In a research note on Wednesday, Wedbush Securities echoed Jensen Huang's comments, saying that while AI is a headwind for software providers, the sell-off reflected an "Armageddon scenario for the sector that is far from reality." 

"Enterprises won't completely overhaul tens of billions of dollars of prior software infrastructure investments to migrate over to Anthropic, OpenAI, and others," the note said. 

Large enterprises, Wedbush Securities said, took decades to accumulate trillions of data points now ingrained in their software infrastructure.

Other analysts see more lasting pressure.

Advisory firm Constellation Research said Wednesday the sell-off reflects concerns that AI could pressure profits and limit how much software companies can charge, rather than signaling a death knell for the industry.

"There's likely to be cannibalization of SaaS by AI-driven workflows and that will impact the multiple the sector trades on," Rolf Bulk, tech equities analyst at Futurum Group, told CNBC.

That said, Bulk argued that a subset of software providers, especially those running mission-critical enterprise workloads such as Oracle and ServiceNow, still have a sustained "right to earn." 

The depth of their data and entrenched role in customer workflows make them more likely to coexist with AI rather than be replaced outright, he added.

That bet is being pursued by software firms such as AlphaSense, a market data and research firm that leverages AI tools across its product offerings.

In a statement to CNBC, Chris Ackerson, SVP of Product at AlphaSense said that the "future belongs to providers that combine advanced AI with trusted content, explainability and deep domain context."

— CNBC's Matthew Chin contributed to this report