As software stocks get slaughtered are these S&P 500 names next to crash?

S&P 500 software firms Axon Enterprise and Duolingo have joined Adobe in seeing their share prices crash due to fears about artificial intelligence (AI) disruption. So is the whole sector in trouble?

I won’t keep you in suspense: my answer’s ânoâ. Investors really need to think carefully about competition right now, but I think some companies are still very well-positioned.

Barriers to entry

There’s no way around the fact that AI can now write software code, so investors need to look for businesses that are protected by other barriers to entry.

One of the best examples is operating in an industry that has specific regulatory requirements. In these situations, existing companies canât easily be replaced by AI-generated alternatives. There are a few S&P 500 names that fit the bill. One is life sciences software firm Veeva (NYSE:VEEV) and another is government-focused Tyler Technologies (NYSE:TYL).

In both cases, there are risks. But I think competing with these companies is harder than just writing the kind of software that can easily be generated by something like GPT-5.

Veeva

Veeva focuses on providing software for life sciences companies. Its products help with clinical trials, regulatory compliance, and quality management.

Targeting one sector specifically can be risky. And this is especially true of healthcare which has been facing its own challenges from the current US administration.

In terms of AI disruption though, the barrier to entry isnât just the ability to write software. It includes domain expertise and validated systems in an industry where mistakes can be costly.

This makes setting up a competing operation more difficult than it would be with something less specialised. And I think it gives the firm better protection from generative AI competitors.

Tyler Technologies

Tyler Technologies doesnât have proprietary data protecting it. But being a software provider for US state and local governments makes it unusually difficult to compete with.

Suppliers for governments need to meet strict security standards and have to be approved as vendors. And getting this is difficult, complicated, and time-consuming for new competitors.

Thereâs always a risk of public budgets tightening in a weaker macroeconomic environment. And with Tyler Technologies trading at some big multiples, this is something to be aware of.

In terms of the risk of AI disruption though, I donât think the firmâs position has weakened significantly. The regulatory requirements still look like a big challenge for competitors, to me.

Software moats

For software companies where the main barrier to entry is producing the product, AI that can write code looks like a real threat. This however, isnât the same across the industry.

I think Veeva and Tyler Technologies both have better protection that comes from specific expertise in a regulated industry. So Iâm keeping my eye on these in case they start falling.

The one that has surprised me so far is Axon. The firm’s vertically integrated into policing and law enforcement and that looks to me like a strong competitive advantage.

Axonâs stock-based compensation costs put me off the company at the moment. But I do think it could be a name that could develop into an interesting long-term opportunity.

The post As software stocks get slaughtered are these S&P 500 names next to crash? appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Adobe, Axon Enterprise, Duolingo, Tyler Technologies, and Veeva Systems. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.