Nvidia CEO Jensen Huang Says the Thinking Behind This Stock Sell-Off Is "Illogical"

Investors are worried that the biggest losers of the artificial intelligence (AI) revolution might be technology companies. Recent improvements in AI models and the release of new AI tools from Anthropic have sparked fears in the market that AI might disrupt the business models of, or even replace, companies that sell software as a service (SaaS companies).

This tech stock sell-off is already being branded by some as the "SaaSpocalypse." The idea driving this tech stock downturn is that if AI gets good enough, companies that buy expensive business software might not need to buy so much of it. Or they might be able to use AI to build their own software, or maintain and upgrade their own software, without paying for ongoing support.

If this story proves correct, major software companies that have built lucrative businesses by selling enterprise software subscriptions might no longer be so valuable -- or might not be needed at all. The harshest effects of this turn in sentiment can be seen in the share prices of companies like Salesforce (NYSE: CRM), Microsoft (NASDAQ: MSFT), and Adobe (NASDAQ: ADBE). The Nasdaq-100 index is down almost 5% in the past five days as I write this and nearly 3% year to date.

CRM data by YCharts

But there's one problem with the SaaSpocalypse story: It might be totally false. Investor fears about software being replaced with AI might be overblown.

Jensen Huang isn't buying the SaaS stock sell-off

Jensen Huang, CEO of Nvidia (NASDAQ: NVDA), at a conference last week said that the belief that software will be replaced by AI is "the most illogical thing in the world." He said he believes that AI will improve software products and work with software companies, not replace them. "If you were a humanoid robot, would you use a screwdriver or invent a new screwdriver?" Huang said.

If this prediction is correct, software companies will likely make more money because of AI companies, not less. Instead of AI being a tsunami that wipes out all software stocks, it could be a rising tide that lifts all boats.

Image source: Getty Images.

AI companies might sell to software companies, not replace them

Anthropic set off the latest SaaS stock downturn by launching a new plugin for its Claude AI platform that can review legal documents. The company describes this tool as being able to "speed up contract review, NDA [non-disclosure agreement] triage, and compliance workflows for in-house legal teams."

Here's the problem with the doom-and-gloom scenario: New tools don't automatically replace expertise. Things like legal review need to be done with extreme accuracy and compliance. Experts still need to supervise and sign off on the work, even if some of the work is automated. Software for specialized markets, based on expertise and long-established trust, adds a lot of value for these complex workflows.

Instead of replacing what software companies sell, it seems more likely that AI companies will partner with -- and sell to -- software companies. AI companies like Anthropic can develop powerful AI capabilities that make software better while software companies keep serving their markets and clients with specialized expertise.

How to buy the dip on software stocks

If you agree that the SaaS stock sell-off is overblown, you might want to consider buying the dip on software stocks, and an easy way to do that is to buy shares of the iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV).

This exchange-traded fund gives you targeted exposure to 114 North American software companies in the technology and communication services sectors. It's delivered average annual returns of 8.4% for the past 10 years and 17.9% for the past 10 years. And it charges a relatively low expense ratio of 0.39%, which includes a management fee. There's no guarantee of future performance, but I think software stocks have a lot of promise.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Microsoft, Nvidia, and Salesforce. The Motley Fool recommends the following options: long January 2028 $330 calls on Adobe and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.