Apollo Global Management‘s David Sambar told CNBC on Thursday that the decline in software stocks on concerns about the disruption of artificial intelligence is not over yet.
“Unfortunately, I think it’s premature,” Sambar, co-head of private equity, told CNBC’s “Money Movers.”
Some Wall Street analysts are relieved by the recent economic recovery. IGV Software ETFrose about 3% in March following a tough start to the year. ETFs are still down 20% this year.
Sambar said software names are under scrutiny and face significant questions around revenue models, gross margin profiles and valuations amid increased competition from Anthropic and OpenAI.
“We know the market is going up and recovering a little bit, but I don’t think any of those four things have changed because there’s a real question mark of what the impact will be as AI lowers the cost of competition and therefore increases the level of competition,” he said.
Sambar, who joined Apollo in 2004, said the transition from AI has been significant and “faster than at any point in my career.”
Sambar said part of the problem is that the industry doesn’t know how the software story will evolve over the next one to five years because the technology itself is constantly changing.
“Nobody knows,” he said.
“People are now recalibrating their valuations and putting in more margin of safety against very large unknowns,” he added.
This explains why most software companies are taking a conservative stance when detailing their outlook for this year.
Sambar also pointed out that there are investment opportunities in trading and share buybacks, with a growing list of software names including: intuition, hubspot and sales forceannounced a stock buyback.
But as RBC Capital’s Rishi Jallia wrote in a note to clients on Thursday, share buyback announcements are almost always overshadowed by concerns about AI.
Jallia said the current debate on Wall Street is whether buybacks are a bullish signal or whether companies are “waving the white flag.” He added that share buybacks could reduce the likelihood of mergers and acquisitions and put a lid on innovation.
“If a company has large cash balances to fund share buybacks, that’s a different story, but large share buybacks mean less funding for future M&A, especially if they are financed with debt,” Giallia wrote.
