Under the impact of AI, is the software industry moving towards "zombification"?

Some analysis suggests that artificial intelligence will have an impact on existing software, data, and professional service companies, but it will not completely destroy them. At least, according to an analysis by Breakingviews (which compared valuation plunges with recent analyst predictions), public market investors seem to hold this view. The analysis shows that companies most severely affected by the impact have dim prospects: if the future truly is a struggle for survival, then it may be wiser to significantly cut investments and costs rather than futilely invest funds to counteract this wave. As the benchmark for software stocks, the BVP Nasdaq Emerging Cloud Index has already dropped by 20% this year. The biggest concern is that chatbots like Anthropic's Claude and Siasun Robot & Automation could become flexible alternatives to existing company products, covering everything from expense management to online booking forms. Data groups, professional service companies, and consulting companies have also been affected by this panic, including London-listed RELX and Thomson Reuters, whose stock prices have fallen by about one-third since the end of 2025. Calculating the "terminal value" of a company's current stock price essentially refers to the permanent value of the company's future earnings, which can predict investors' pessimism about the future situation. This is the final step in standard discounted cash flow analysis. The analysis typically starts with calculating all cash flows generated by the company over a specific period (usually three to five years). Any additional value can be determined by setting long-term growth assumptions and discount rates. Taken together, this can provide a reasonable estimate of the company's value. Conversely, starting from the current market valuation can reveal the growth expectations implied in the stock price. For example, consider ServiceNow (NOW.US), whose software helps large enterprises manage IT and human resources processes. According to data released by Visible Alpha on Tuesday, ServiceNow's enterprise value is $105 billion. Analysts expect its free cash flow to increase from $5.8 billion this year to $10.3 billion in 2029. Discounting each year's forecasted value at a 10% rate and summing all discounted values, the implied value of these recent cash flows is $27 billion. Subtracting this amount from the enterprise value implies that ServiceNow's business value starting in 2030 is equivalent to $78 billion. When converted to the 2030 US dollar value, also using a 10% discount rate, it amounts to $114 billion. The final question is, what long-term growth rate can reach this figure? The answer is 0.9%. Compared to recent times, this growth rate is quite meager. Last year, ServiceNow's enterprise value was around $200 billion, meaning that using the same calculation method, its growth rate was 5.7%. In other words, the painful trade-offs brought by artificial intelligence do not necessarily mean that the end of the world is imminent. Instead, investors seem to expect things to eventually stabilize. Other companies affected by the sell-off face similar situations. The median long-term growth rate for the 76 stocks studied by Breakingviews (including BVP index components, some European software companies, and some underperforming data and professional service groups) is 0.9%. The same terminal value calculations indicate that about 60% of these companies will see growth from 2030 onwards, but only one-third will have growth rates exceeding 2%, which merely keeps up with inflation. Exceptions like Monday.com (MNDY.US), RingCentral (RNG.US), and Wix.com (WIX.US) seem to already reflect expectations of significantly lower free cash flow from 2030 onwards. However, this is only a very rough analysis, and if the analyst's models are outdated, the results may not be accurate. For example, sell-side brokers may not have adjusted their forecasts for before 2029, while investors may be using more pessimistic forecast data. Additionally, using a uniform 10% discount rate poses problems considering the differences in industries. Nonetheless, this analysis at least roughly indicates that the painful trade-offs brought by artificial intelligence reflect investors' current expectations. The key is that, apart from a few exceptions, artificial intelligence is more likely to "zombify" existing companies rather than rapidly eliminate them. If this is indeed the case, it raises the question of how CEOs should respond. Recent analyses by Jefferies Financial Group Inc. suggest that stocks, including the $260 billion market cap of SAP (SAP.US), are trading close to what the brokerage calls "liquidation value". It refers to a scenario where if a company's management accepts the reality of the company's decline, cutting all growth-related expenses such as sales, marketing, and research and development to squeeze out as much cash from the company as possible, what would the company's value be? The idea is to let some customers go while obtaining a 70% operating profit margin from those who remain - according to Jefferies Financial Group Inc., private equity-owned cloud software and software companies have achieved such profit levels. This is essentially a strategy for declining companies whose products are no longer favored. Currently, no mainstream data or software company has taken this path. This is to be expected, as most companies, like ServiceNow, still maintain strong growth momentum. The disruptive artificial intelligence products of concern have only just been launched and may not yet gain market acceptance. Nevertheless, the message conveyed by the market is that many companies are on the verge of stagnation - and some may even face rapid contraction. If investors have priced these companies as they would zombie companies, one naturally wonders whether these companies will actually end up operating like zombie companies.