Altimeter chief executive Brad Gerstner believes that some software names will weather the AI storm, but warns that others will likely head lower.
Speaking in a new CNBC interview, Gerstner says the recent correction in software valuations reflects uncertainty around long-term cash flows rather than a loss of confidence in current performance.
“What AI has done over the course of the last several months… people just said something very rational. I can’t see as far into the future. So I’m going to pay less for the terminal value. I’m going to pay less for those future free cash flows.
I’m not penalizing them because they’re missing their numbers today. I’m just putting it in the too-hard bucket because I can’t predict those future numbers.”
According to Gerstner, the only way for software companies to escape that valuation pressure is to clearly demonstrate that AI is accelerating their core businesses, pointing to data infrastructure companies as early winners in that shift.
“So the only way that reverses, Scott, is those companies have to accelerate their core revenues and show that they are beneficiaries of AI. The companies that do that, Databricks, is accelerating their core revenues. I think this quarter they grew over 60%. Snowflake, ClickHouse are companies accelerating their core revenues because AI relies on them. I think they’ll do fine.”
But Gerstner says application software faces a tougher road ahead.
“But application software, where I can’t see into the future, they’re going to have lower multiples.”
While the S&P 500 Application Software Sub-Industry Index is up over 3% after Friday’s trading session, it is down more than 20% over the past year.
Wedbush’s Dan Ives recently said investors are treating AI as an existential threat to software companies, triggering an “Armageddon-like” sell-off.
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