Citi warns: "AI disruption" could cause software stocks to retest 2023 lows, with long-term terminal value evaporating by about one-third

Glonghui, February 10th｜Citi's latest strategy report points out that the recent decline in the software and services sector is mainly due to a revaluation of the terminal value amid concerns over “AI disruption,” rather than a deterioration in short-term fundamentals. The market has already priced in a compression of terminal P/E ratios by about 10%-20%. If this compression expands to 30% in the future, sector stock prices could fall back to or even below the mid-2023 lows, implying that about one-third of the long-term terminal value could evaporate. On the trading side, trading volumes and implied volatility of major software ETFs have surged simultaneously, indicating that the market has entered a panic selling phase. Citi believes that such extreme trading behavior typically signals a selling climax, and a technical rebound may occur in the short term, but this does not mean that long-term risks have been eliminated. Citi points out that the terminal value revaluation brought by AI will not disappear, and the software industry will shift from broad-based gains in the past to a stage of significant individual stock differentiation. In the future, the market will focus on evaluating companies’ AI integration capabilities; those able to leverage AI to improve efficiency may continue to grow, while those whose business models are easily replaced by AI will face long-term pressure. Citi believes that the market is now entering a more volatile bull market phase, with software stocks experiencing the most intense adjustment within it.