Key Highlights

  • DA Davidson cut ratings on several software companies, and the recurring theme was competition from AI.
  • For investors already nervous about AI giants muscling into enterprise software, the downgrades added analyst weight to the concern.
  • DA Davidson downgraded BlackLine, the financial-close software maker, to Underperform from Neutral with a $23 price target.
  • DA Davidson also lowered Pegasystems to Neutral while keeping a $32 price target, part of a wave of software cuts.

A string of downgrades from DA Davidson on Monday, September 28, crystallized a growing Wall Street worry: that AI may eat into the Business of traditional software makers.

A wave of cuts in one day

Software stocks were already on the back foot on Monday, September 28, hit by soaring bond yields and Meta (NASDAQ:META)'s launch of an enterprise AI platform. Then came a round of analyst downgrades that put a sharper point on the fear. DA Davidson cut ratings on several software companies, and the recurring theme was competition from AI.

The firm downgraded BlackLine (NASDAQ:BL), the financial-close software maker, to Underperform from Neutral with a $23 price target, per analyst Lucky Schreiner. It cut UiPath (NYSE:PATH), the automation software company, to Underperform with a $10 target. And it lowered Pegasystems (NASDAQ:PEGA) to Neutral, keeping a $32 target.

The AI disruption argument

The reasoning behind the cuts goes to the heart of a debate gripping the software industry.

For UiPath, the concern was pricing.

The market reaction

Investors took the calls seriously. BlackLine fell hard, extending a painful year in which the stock has roughly halved. Manhattan Associates, Pegasystems and UiPath also slid. Other software names such as Braze (NASDAQ:BRZE), Atlassian (NASDAQ:TEAM), ServiceNow (NYSE:NOW) and Salesforce (NYSE:CRM) fell on the same day, showing how broad the pressure was.

The timing was notable. On the same day, Meta unveiled its Meta Enterprise Platform and hired MongoDB (NASDAQ:MDB) chief executive CJ Desai to run it, a move that sent MongoDB shares tumbling by roughly a fifth. For investors already nervous about AI giants muscling into enterprise software, the downgrades added analyst weight to the concern.

Not everyone agrees

It is worth remembering that these are one firm's views, and the debate is far from settled. Raymond James (NYSE:RJF)' Brian Peterson raised his target on Braze to $33 from $27 and called it a "secular winner" to "buy the dip." Piper Sandler (NYSE:PIPR) said MongoDB's share-price reaction looked "overdone." And the same DA Davidson has been bullish elsewhere in tech, with analyst Gil Luria seeing $2,000 as a reasonable level for Micron (NASDAQ:MU).

Rates are also part of the story. Some of the selling likely reflects the rate backdrop as much as any AI verdict, since fast-growing software companies are valued on profits expected far in the future.

Future Earnings test the disruption thesis

The key test for the disruption thesis will come in future earnings reports, when software companies reveal whether customers are actually shifting budgets toward AI tools. Accenture (NYSE:ACN)'s results before Thursday's open will offer an early read on corporate technology spending, and OpenAI's DevDay on Tuesday could bring new products that sharpen the debate.

Meanwhile, the PCE Inflation report on Wednesday and Friday's September jobs data will steer bond yields, which remain the other big force hanging over software valuations.