That changed quickly. It is now the silky-voiced digital version of the barbarian at the gate.
The fear of AI laying waste to business models – particularly those of firms that build and rent out software – is real, and it is tearing down share prices in its wake. Any company which deals in technology, from healthcare to transport, even something as benign as insurance broking, is in the firing line.
Nothing, it seems, is safe. The fear is also overblown.
The falls this year are nothing short of extraordinary, moving into the territory of a proper tech wreck. (Macquarie’s analysts have dubbed it a “Sassacre”, in reference to software-as-a-service businesses being on the front line of the attack.)
Consider the Australian market over six months. Losses started slowly but are surely gathering steam. WiseTech Global is down 63 per cent, healthtech hero ProMedicus 60 per cent, Xero 56 per cent and Seek 35 per cent. Life360 is off 50 per cent, while Carsales and REA Group are both down 35 per cent over six months.
The rout has compressed the price-to-earnings ratios of these tech players to levels that now value them along the lines of low-growth, low-margin businesses. Remember, these are not loss-making start-ups scratching for a purpose; many count their lifespan in decades.
The same drama is playing out around the world, with names like Salesforce and DocuSign taking a beating. Even New York-listed Atlassian is off 45 per cent, putting a serious dent in the paper wealth of billionaire co-founders Mike Cannon-Brookes and Scott Farquhar.
What is most striking is how indiscriminate the destruction has been.
King code
Much of the disruption stems from the threat posed by Anthropic’s Claude, a rival to OpenAI’s ChatGPT that is more enterprise focused.
Essentially, Anthropic’s low-code or no-code tools allow any user without experience to become a software developer or build business applications. It’s feared this can cut the lunch of existing software companies. The argument goes that if anyone now can design logistics software, that cuts out WiseTech. Anyone can now do medtech – slicing up ProMedicus’ business – while Atlassian, whose core business is collaborative coding tools, simply won’t have a place in this new AI world.
Essentially, any business which has wielded the power of specialised knowledge and sold it on a recurring basis (generating plump profit margins) is at risk, it seems.
Then there is the retail side. The prospect of consumers unleashing agents online to find the best insurance, job, or even house to buy again threatens to make the middlemen obsolete.
And this is why the sell-off has perplexed many fund managers and the companies themselves. There’s little regard for vastly different business models or fundamentals.
Carsales chief executive William Elliott believes his business has natural built-in defences. “Our competitive advantage is the infrastructure we’ve built beneath our marketplaces,” he says.
He describes this as a “technical ecosystem” linking customers, auto dealers, finance providers and carmakers. And like ecosystems this means buyers rely on it and stay there. It is a combination of “trust, data and reach” that others can’t replicate, Elliott says.
Sam Hupert, the co-founder and chief executive of the $12bn ProMedicus, and among those hardest hit, shrugs off the notion that software has moved from moat to a sinkhole. “This is a gross generalisation and overstatement of AI capability,” he says. Like Carsales, ProMedicus’ core product – medical imaging software used by radiologists – has high barriers.
“Our software is proprietary; it wasn’t developed on an easily or readily available toolkit or platform. It is deeply technical and highly specialised, and very domain specific. It’s not a generic software stack and it’s not one that others know of the technology … we haven’t published a road map of what we’ve done.”
This is also the view at Cochlear, another medical-tech firm that specialises in restoring hearing loss. “The moat that we’ve got around us is built on the weight of investment that we have over time, particularly in R&D, Cochlear chief executive Dig Howitt says.
“Strong and long-term commitment to R&D is a big part of our technology advantage and our product advantage.” Then there are the sales and clinical teams around the world that support that.
Hupert likes to remind shareholders that regulation reinforces the moat for many. “Healthcare is a highly regulated environment, you can’t just whip up a program and there you go; it has to go through a whole regulatory cycle and be validated,” he says.
“And, importantly, it is a mission-critical solution because patient safety is at stake.” Other industries that work under heavy regulation include banking and insurance.
Fightback
Companies are fighting back against the threat of AI by using AI. Carsales recently struck an agreement with ChatGPT to ensure it is visible when potential buyers are doing their search at the “top of the funnel”.
This is about delivering higher-quality leads, Elliott says. “The vast majority of our traffic comes directly to our sites but like we have done with traditional search engines, we have our brands in those search engines … that strategy is no different with ChatGPT.”
REA has launched a wave of its own AI-led consumer experiences including property tours. Temple & Webster has rolled out proprietary AI shipping software to reduce costs. Origin Energy’s Kraken platform uses AI to help customers link up energy pricing and renewable supply. ProMedicus has integrated AI into radiology workflows, which also helps it sell more options.
Cochlear’s Howitt is of the firm view that AI is an enabler of his business. “There’s not nearly enough audiologists in the world to deal with the level of hearing loss,” he says.
“The solution to that gap between the need for care and the availability of care is technology, and AI is a huge opportunity.”
Still, in the market panic the message is being trampled. There are likely to be more shocks to come. While Anthropic currently has the lead (helping to raise cash and giving it a thumping $US380bn, or $510bn, valuation), OpenAI will no doubt hit back with its own powerful business tools.
Others, including Google’s Gemini and Microsoft, will continue to scale up their own versions of industrial agents. With every AI update there will be more market tremors until investors finally get a grasp of what AI can and cannot do.
Even then it may not be back to business as usual for software companies. AI agents will change the competitive landscape in areas that have yet to be tested. And any threat will come rapidly.
“Amazon ruined companies where you had a commoditised poor product or provided terrible service. Good companies thrived,” says Angus Aitken of Mount Capital.
Some might even feel the pinch of businesses reallocating spending away from them and towards the high cost of running AI applications in their business, simply because a dollar on tech spending can only be spread across finite places.
Meanwhile, names like WiseTech and Xero may feel the short-term strain of the share collapse. Both recently undertook big acquisitions at top-of-the-market prices. Those deals worked at the time because inflated shares allowed them to afford it, but these buyouts are now looking like burdens.
Xero paid $4bn for bill payments platform Melio partly by selling shares that are now deeply under water – a dilution that will put loyal investors off-side.
In WiseTech’s case, it funded last year’s $4.5bn buyout of US-based e2open entirely with debt. Banks were falling over themselves at the time to lend money. Now that the AI barbarian has been unleashed, the mood may well have changed.
This article first appeared in The Australian as Code red: AI unleashes its own tech wreck on software shares
