Investors in the global software sector are experiencing heightened unease as new artificial intelligence (AI) models emerge, potentially threatening the traditional functions provided by existing companies. Recent weeks have seen a notable shift in sentiment, with analysts highlighting the precarious nature of equity markets, described as a “sniper’s alley” by Deutsche Bank. This analogy reflects the careful scrutiny traders are applying to identify which firms may thrive and which could falter due to advancements in AI technology.
In response to this shifting landscape, strategists at Bernstein have developed a framework for evaluating the risks associated with AI disruption among software providers. Their analysis centers on two critical factors that can influence a company’s vulnerability to AI encroachment.
The first factor, termed “automatability,” assesses whether a company’s core operations can be fully automated by AI systems. Bernstein’s analysts, Richard Nguyen and Mark Moerdler, explain that businesses with low automatability rely heavily on proprietary data, complex workflows, and deep integrations—elements that generic AI models struggle to fully replicate. Conversely, companies with high automatability primarily derive value from processing publicly available or standardized information and handling repetitive tasks, which are more susceptible to automation by emerging AI models.
The second factor refers to the “defensibility” of a product, evaluating how difficult or costly it is for customers to transition away from a given software once it has been adopted. Companies characterized by low defensibility face low switching costs, limited ecosystems, and weak customer loyalty, making them more vulnerable. In contrast, high-defensibility firms exhibit significant switching costs, robust ecosystems, embedded workflows, and established brand communities that deter customers from making a switch.
In light of these assessments, Bernstein analysts have identified companies with a more favorable risk profile regarding AI disruption. Specific firms have been highlighted for their substantial upside potential, provided they effectively execute their respective AI strategies. Among IT services providers, companies based in France and Italy have been identified as having the least exposure to competitive threats from AI advancements. Another company is also viewed as “relatively well-positioned” due to its extensive enterprise relationships and intricate application and infrastructure setups.
Furthermore, Bernstein emphasizes the pressing need for service providers to transition swiftly towards an AI-first model in order to fully leverage the transformation towards a services-as-software paradigm. The analysts assert that adapting business models is not simply beneficial but essential for survival and growth in this evolving technological landscape.
