BofA: GenAI Fears Cause 30% Software Stock Derating

Software Sector Faces Major Valuation Reset Amid AI Concerns

Bank of America reports that global software stocks have experienced a significant valuation derating of approximately 30% EV/EBITDA. This trend is driven by market fears that generative AI could disrupt traditional Software-as-a-Service business models.

Analysis of Market Compression

According to BofA analysts, the narrative that generative AI will disrupt the software industry has gained traction over the past six months, leading to heavy multiple compression. The sector now trades at an average of 13.1x EV/EBITDA, a stark contrast to its five-year average of 21x.

Impact on U.S. Software Valuations

The U.S. software market has been particularly affected. Valuations in the United States compressed by 35% over the last six months, falling from a multiple of 32.3x to 21x EV/EBITDA. This analysis was highlighted in a report led by Frederic Boulan.

Summary and Outlook

The recent derating reflects a fundamental shift in investor sentiment towards the software sector, primarily due to the perceived threat of generative AI. Market participants will closely watch how software companies adapt and whether current valuations present new opportunities.

FAQ

Q: Why have software stock valuations decreased?
A: Valuations have fallen due to fears that generative AI will disrupt the Software-as-a-Service business model, causing a 30% derating according to Bank of America.

Q: What is the current valuation multiple for the software sector?
A: The sector is now trading at 13.1x EV/EBITDA, down from a five-year average of 21x.

Source: Investing.com