ASX technology sector decline continues as software stocks suffer rout at hands of AI rise

The relentless selling of software companies in 2026 extended into a rout on Wednesday morning when local technology stocks plunged 8 per cent on worries they will be disrupted by artificial intelligence.

On Wall Street the tech-heavy Nasdaq Index tumbled 1.4 per cent and a rotation into commodities such as gold, silver, lithium, and copper also extended.

However, some fund managers and brokers believe the selling is an opportunity for investors to buy high-quality stocks at a steep discount as the ASX technology sector marks six consecutive months of declines.

“Australian technology has been swept up in the AI euphoria risk trade with the market seeing materially lower barriers to entry and disintermediation risks potentially impacting sales and margins over the medium to long-term,” RBC Capital told investors.

“The associated multiple compression has been swift with some share prices halving in the last six months.”

At the open on Wednesday, cloud accounting company Xero plunged 11 per cent to a two-year low of $84.23, logistics software giant WiseTech plunged 6 per cent, and former market star Pro Medicus lost another 5.5 per cent to $167.73.

That trio has seen around $50 billion wiped from their valuations over a horror six-month run fuelled by fears their business customers may cancel subscriptions in favour of cheap offerings built by AI models such as Claude Code, the agentic coding tool of Anthropic.

Vulnerable to AI

However, Ron Shamgar, a portfolio manager at the TAMIM Australian Equities Fund believes investors’ fears are overblown with the rout bearing similarities to a 2023 sell-off in healthcare stocks on worries about the arrival of new weight loss drug Ozempic.

“It feels like investors have decided AI is going to replace every software company in the world or hammer their growth rates because a bunch of people are vibe-coding stuff,” he said.

“The risk is you get more competition and companies can use agents to code, so you might not get that steep growth. And I don’t dispute that there’s always disruption in tech, but I think many of these software companies will benefit more from AI than they lose.”

Mr Shamgar said software companies that sell to small-to-medium-sized business clients on a per seat (employee/user) basis are more vulnerable to disruption, as it’s logical that AI services can replace employees that are the customers of these software companies.

As evidence he pointed to the 66 per cent one-year plunge in the share price of homegrown tech giant Atlassian. It is a business that sells software products on a per seat (employee user) basis to large corporations.

“Maybe those large organisations will be incentivised to cut that software cost out in time and use their own internal AI agents to build out,” Mr Shamgar said.

“But if you look at WiseTech, (executive director) Richard White is quite clever, they’ve just changed the entire pricing model from per seat (user) to per (physical) container to de-risk the business.

“Software businesses that have hardware as well will be less impacted. So (sports data business) Catapult, its hardware you cannot replace with AI. You’ve also got to look at the moat and network effect these businesses have via third-party integrations, so there’s lots to consider and arguably lots of businesses are oversold.”

Mr Shamgar added that one of the largest operating costs for software development businesses is staff, which means they also have the potential to slash their own costs and lift profit margins.

“So if (weak) sentiment doesn’t change, I think we’ll see a flurry of takeovers on the ASX as the savvy private money will buy these companies at cheap valuations and do well.”

Brokers weigh in

Broker RBC Capital says it has adjusted its valuations across the tech companies it covers on the ASX to reflect AI risks and the prospect of higher interest rates.

It said it still thinks Pro Medicus, Xero and WiseTech are buys alongside other businesses that have wide network effects.

“However marrying up an attractive entry point is difficult in the midst of negative macro tech sentiment and the tide running out fast,” it said.

Globally, the world’s largest software sales businesses such as Salesforce, Oracle and Adobe have also all plunged over the past year.

While Microsoft’s weaker-than-expected December quarter results and a warning that its enterprise sales are slowing added to investor worries.

Graphic design business Adobe is also a rival of Australia’s largest private software company Canva, with speculation now swirling that the Sydney-based software player will see its own $65 billion valuation marked down significantly.

In a fast-moving market of varying opinions and volatile share price action, investment bank Macquarie claimed the market is too focused on the threat from AI agentic agents such as Claude and insufficiently worried about Elon Musk’s plans to develop a pure AI software company named Macrohard.

“Given Musk’s success in bringing disruptive products to market, Telsa, Full-Self Driving, SpaceX, xAI, we see Macrohard as an overhang for software-as-a-service valuations,” Macquarie told clients.

The latest leg lower on Wednesday morning came on reports Anthropic has launched an AI-powered legal and data services agent, which could theoretically challenge software players in this space such as ASX-listed Nuix.