Chart of the Week: Software selloff creates opportunity for these two stocks
Can AI disrupt the software business model?
This week’s insights come from Morningstar’s market strategist, Lochlan Halloway.
What is happening to tech?
2026 has seen a dramatic escalation in the panic-selling of tech stocks. Since the start of January, the US software index has plunged 20%, and our local tech sector is down 10%.
What can protect a software business?
Some companies face a real existential threat. But not all software is the same. Below are a few features that distinguish the businesses better placed to withstand AI disruption.
- Unique data. AI models are trained on publicly available information. When a company holds proprietary datasets that cannot be recreated or sourced elsewhere, the competitive position should hold. The key test will be specificity.
- Workflow complexity. AI can replace some processes, however the more complex and mission-critical the workflow, the harder it is for a model provider to replace.
- Network effects. Where a platform connects multiple parties who reinforce each other’s usage. One might be able to build a replacement tool, but if the ecosystem they need to interact with all runs on the incumbent platform, that is likely to be of less value.
Xero and WiseTech oversold
Some businesses listed on the ASX enjoy attributes we think help shield them from AI disruption.
Xero’s defence is its network with ~70% of its ANZ subscribers join through their accountant, not by choosing the product themselves. This creates a self-reinforcing loop. The stock has traded above fair value continuously since 2017 but that has now changed. Xero is a trading well below our fair value estimate of $100 for the first time in almost a decade.
WiseTech’s defence is switching costs and workflow complexity. CargoWise handles a plethora of operations across the chain and retention has exceeded 99% annually since 2013. Leaving does not just involve migration risk. It imposes an ongoing competitive disadvantage. WiseTech currently sits firmly below our fair value estimate of $138.
The full edition is available to Morningstar Investor subscribers and trialists.
You can find previous editions of Chart of the Week here.
