RBC on why AI is not the “death of software”

Investing.com -- RBC Capital Markets pushed back against the idea that artificial intelligence will render traditional software obsolete, arguing that the narrative around the “death of software” is overstated.

While software stocks have been under pressure in recent weeks, RBC said the weakness reflects misplaced concerns.

The IGV software index is up 6% year-to-date, but that performance has been carried by Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), and Palantir (NASDAQ:PLTR); excluding those names, the index would be down 14%, RBC notes.

The broker said the market is split between two camps: one claiming “all software will be replaced by agents and multi-agentic systems” and another believing incumbents’ “valuable data and distribution” will allow them to endure and eventually monetize AI.

Instead, RBC analysts led by Rishi Jaluria take a middle view, arguing that “AI will benefit some, but not all incumbents, while also creating net-new scaled companies and accelerating AI-focused M&A.”

The report questioned whether incumbents’ much-discussed data advantage is as strong as often claimed, citing ownership ambiguity, data commoditization and the shifting importance of real-time data over historical datasets.

At the same time, RBC pointed to risks of disintermediation, where AI-native vendors augment existing platforms before competing more directly, potentially reducing engagement and growth for large incumbents.

Lower barriers to entry from tools like “vibe coding” may intensify competition, but analysts said this could expand overall software budgets by fostering more innovation.

M&A is likely to be a key strategy for traditional vendors, similar to how cloud adoption spurred acquisitions in the past. However, monetization of AI may take longer than investors expect, with broad adoption across enterprises potentially not materializing until 2028 or beyond.

“In the interim, we may start to see indirect monetization of AI, whether that shows up in greater consumption, higher engagement, improved win rates, or better gross retention rates,” analysts said.

RBC identified Microsoft, Intuit (NASDAQ:INTU), HubSpot (NYSE:HUBS), MongoDB (NASDAQ:MDB) and Pegasystems (NASDAQ:PEGA) as best positioned to “cross the chasm” in a post-AI world, while it was more cautious on Salesforce (NYSE:CRM) and ZoomInfo (NASDAQ:GTM).

“While investor fears are likely overblown, we also believe investors should focus on picking the right stocks within software and being careful about terminal value risk creep,” the analysts wrote.

RBC also said stocks such as Dynatrace (NYSE:DT), HubSpot, MongoDB, ServiceNow (NYSE:NOW) and Snowflake (NYSE:SNOW) have seen pullbacks that may be overdone.