Why Are Software Stocks Suddenly Collapsing?

Over the past 20 years, no industry has generated more wealth than software. It turned physical tools into digital ones, manual procedures into automated ones, and developing startups into multi-trillion dollar companies. However, in early 2026, that same dominance over industries is being questioned. Duolingo has fallen more than 60% in less than a year. Monday.com is down over 50%. Even Figma, one of the most anticipated IPOs of 2025, has lost almost 75% of its value. These were not struggling startups; they were market leaders. So what changed? 

To understand this shift, we should first take a look at what made software so valuable initially. In the 1990s, businesses relied on paper records and slower manual systems to get work done. Programs like Excel and Word make work much faster and more accurate. The change from software discs to online delivery was a major breakthrough. In 2000, Salesforce pioneered an online model by running programs on its own servers and charging customers a monthly subscription. This approach, known as Software as a Service, or SaaS, allowed companies to generate steady revenue. Each customer added income at a relatively low cost. 

After the 2008 financial crisis, central banks cut interest rates down to near zero values. With cheap borrowing, many investors poured their money into fast-growing tech companies. Venture capital investment grew from $45 billion to over $330 billion over the decade. In 2021, software startups recorded $120 billion in funding alone. Many firms focused on expanding instead of making profits. Investors were willing to keep funding these startups as long as revenue continued to grow.

Over time, businesses became increasingly dependent on software. On average, each American company used around 371 different software tools, costing upwards of $8,000 per employee each year. Companies couldn’t switch platforms easily because of the risk of losing data and the retraining of workers. Because of this, many software companies were able to sustain customer demand, having incredibly low churn rates of about 4% each year. This stable subscription income justified software’s high stock valuations. 

Artificial intelligence is now reshaping the industry. Over the past few years, AI systems have evolved from chatbots and are starting to carry out real business tasks. Earlier this year, Anthropic released a legal assistant that can automate contract reviews, also known as Claude. The announcement alone caused software stocks to drop by almost 15% in a day. Investors are becoming skeptical about whether or not big businesses need as many specialized tools if AI could take the role of multiple functions at once. 

Figma’s decline illustrates this concern to investors. After debuting at a $60 billion valuation, its stock dropped to roughly $10 billion in months. AI tools are now able to design entire websites and apps using short text prompts. Such tasks previously required paid subscriptions and teams of designers. Despite Monday.com’s revenue growth by 400% since its IPO, its stock lost more than half of its value. Even if AI doesn’t fully replace these platforms, it reduces the need for companies to pay for multiple subscriptions.

The market’s trends reflect this shift. The iShares Expanded Tech Software Sector ETF has fallen more than 30% in recent months, even as the market remains strong. Investors are no longer valuing companies based on revenue, but on whether those companies will survive in an AI-driven world. 

In the past, software has thrived because it increased productivity and netted predictable income. Modern artificial intelligence threatens both of those fields. As AI becomes more capable and capital becomes more expensive, investors are reevaluating whether or not the same software model that dominated the last two decades will be able to dominate the next two.