Advancements in AI, including data analysis tools and “vibe coding” software built from prompts, have increased investor concerns about the impact on software stocks. The ASX 200 technology sector has fallen over 40% since September 2025.

We have reviewed our software coverage and lowered the Morningstar Moat Rating on four companies.

REA Group (ASX: REA)

Why it matters: We have reviewed our software coverage and identified specific risks for REA Group. We believe artificial intelligence could erode the moat over time, particularly if advances accelerate. The main concerns are longer-dated but revolve around the potential reduction in eyeballs per listing.

  • If AI becomes the primary means with which consumers interact, specifically in searching for a new home, this can erode REA’s pricing power. REA monetizes list-based search through tiered placements for auction visibility. AI-curated shortlists based on user prompts can diminish this value.
  • AI also lowers software development costs, reducing the cost to replicate. Domain could narrow the feature gap more quickly than previously assumed. Recent 9% operating cost growth in the first half, outpacing 8% revenue growth, hints competition is intensifying.

The bottom line: We lower REA Group’s moat to narrow, from wide, and change our Morningstar Uncertainty Rating to High, from Medium. We cut our fair value estimate by 8% to $126 per share, reflecting a shorter duration of excess returns rather than changes to our near-term forecasts.

  • Shares are overvalued. We believe the market expects outsize price hikes to persist for longer than we do. Our long-term forecast assumes a 7% CAGR in residential revenue growth for the next decade, driven nearly entirely by high-single-digit price increases.

Big picture: As Australia’s leading property portal with a two-sided network effect of agents and buyers, the firm has defenses against AI, and the network effect needs to be broken down. But, a reinvigorated Domain, under CoStar’s ownership, and AI buyer agents are longer-term competitive threats.

Technology One (ASX: TNE) & Hansen (ASX: HSN)

Why it matters: We reviewed our coverage and identified risks for specialized enterprise software providers. We believe AI could erode the moat over time by weakening switching costs. We are concerned by the speed of feature replication, lower development costs, and reduced barriers to entry.

  • If advances accelerate, niche point solutions could chip away at Technology One’s integrated ERP suite. A breach of its suite exposes all modules to competition. Lower development costs may also attract global vendors like SAP into its niche public sector segments, gradually putting pressure on pricing.
  • But Hansen already has limited pricing power, with organic revenue growth often below the rate of inflation. We believe higher developer productivity and cheaper development costs intensify competition and could further erode pricing for Hansen’s customized billing software.

The bottom line: We downgrade Technology One’s moat rating to narrow, from wide, and Hansen’s moat rating to none, from narrow. We also changed our Morningstar Uncertainty Rating for both enterprise software providers to High, from Medium, given greater uncertainty around future competition.

  • We cut our fair value estimate for Technology One by 6% to $22 per share, reflecting the moat downgrade. Shares are overvalued despite the fall. We expect revenue growth of around 10% over the next decade, driven mostly by product expansion within existing customers.
  • We maintain our $5.30 fair value estimate for Hansen. Shares are fairly valued at current prices. We already forecast growth for Hansen, beyond 10 years, to only earn the company’s cost of capital. Our moat downgrade now reinforces our long-term growth concerns.

Fineos (ASX: FCL)

Why it matters: AI could dramatically reduce the cost of replicating Fineos’ product functions, lowering customer switching costs or marginalizing product value. Therefore, Fineos may need to constantly lower its take rates and lift costs/investment to address the threat.

  • The firm still has a stronger defense against AI than its generic software peers. Its regulatory licenses to operate, proprietary data sources, and a highly risk-averse customer base are likely to confer a competitive advantage on Fineos, given switching costs.
  • However, the duration of the switching costs is likely to be shorter than we previously thought. Life insurers, Fineos’ main customers, are likely to be able to do more with rapidly advancing AI at lower cost and, over the long term, gradually reduce their dependence on Fineos’ products.

The bottom line: We downgrade our moat rating on Fineos to narrow from wide. We still expect switching costs to support excess returns over the next decade. However, these switching costs are likely to reduce and materially curtail returns beyond. AI presents a longer-term disruption risk.

  • Shortening the expected excess return period means we cut our Fineos fair value estimate 11% to $3.30. Still, shares are attractive, trading at a 24% discount to our revised valuation. We think concerns about AI are valid, but the market is too pessimistic about the rate of change.
  • Switching costs for life insurance customers remain substantial, given the vast regulatory certification process, which takes years; substantial disability and absence claims data, which would take nearly a decade for a new entrant to build up; and Fineos as the system of legal record for claims.

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years.