AI and The Software Rout: Lessons From the Handset Industry and Why Indian IT is Still Not Cheap

Core Insights - The recent volatility in global enterprise software stocks has been unprecedented, with significant underperformance over the past year, raising concerns about the impact of AI on the software industry [1][2] - The introduction of a new AI plug-in by Claude has sparked fears regarding AI's potential to disrupt the software sector, leading to a broader discussion among industry experts [2] Historical Context - The launch of the iPhone in January 2007 marked a significant turning point in the mobile industry, surprising competitors and leading to a shift in market dynamics [3][4] - Following the iPhone's unveiling, Google pivoted its strategy towards developing a sophisticated operating system, resulting in the creation of Android, which now holds a 70% market share [4] - The iPhone's introduction also contributed to the decline of major players like Nokia and BlackBerry, who failed to recognize the disruptive potential of the new technology [5][8] Market Performance - By the end of 2007, Nokia and BlackBerry had market capitalizations of $150 billion and $100 billion respectively, but these figures would drastically decline in the following years due to the iPhone's impact [7][9] - By 2012, Apple captured approximately 70% of global mobile handset industry profits, despite holding only a 10% unit share, illustrating the profound effect of the iPhone on competitors [9] Current Industry Dynamics - Recent concerns about AI disruption have led to a significant decline in the stock prices of SaaS companies, despite their strong business performance in recent years [15] - For instance, Adobe, which reported 11% revenue growth and 15% net profit growth, is currently trading at a trailing PE of 15.5 times, indicating a disconnect between performance and market valuation [15] Investment Considerations - Investors are advised to approach the current market with caution, considering multiple potential outcomes rather than adopting a "buy the dip" mentality [13][16] - The Indian IT services sector is currently not priced for disruption, trading at high PE multiples despite lower revenue and profit growth compared to SaaS companies [19][21] - Historical data shows that during previous disruptions, leading IT services companies traded at lower PE multiples, suggesting that current valuations may not reflect the risks posed by ongoing technological changes [21][22]