If you have been a participant or follower of/in the stock markets for a decade or longer, you will know that the week gone by was anything but normal. No, it’s not only about the crazy volatility in gold and silver or the rout in bitcoin. What made it exceptionally unusual was the rout in global enterprise software stocks, which, as it is, have been underperforming the markets significantly over the last year. The same technology stocks that many apparent ‘experts’ claimed ‘hands down,’ over the last three years, ‘will be beneficiaries of the AI revolution’. Get that? Dan Ives, the global head of Technology Research at Wedbush Securities, a Wall Street firm, had this to say: In 25 years, this structural sell off in software is unlike anything I have ever seen.
This was what defined last week! The trigger for this: A plug-in that Claude introduced in its AI platform to perform tasks across legal, sales, marketing and data analysis suddenly created concerns on how AI could disrupt the software industry. Then more information unravelled over the next couple of days, as many software coders, developers and entrepreneurs gave their views on how AI was upending the software industry. What should you make of it? Let’s take some lessons from history.
The iPhone saga
It’s January 9, 2007. Steve Jobs had just wowed the audience and the mobile industry when he unveiled Apple’s new product — the iPhone (You can check out how he wowed the audience in the first five minutes of this video link https://tinyurl.com/stevejobs07). It took the entire industry by surprise. No one apparently had expected a new product with the level of differentiation and sophistication that the iPhone offered.
In the book, Losing the Signal: The Untold Story Behind the Extraordinary Rise and Spectacular Fall of BlackBerry, authors Jacquie McNish and Sean Silcoff describe an interesting incident that happened at the Google headquarters soon after the launch. Till then, Google was working on two handset operating system projects – one, that could be developed quickly and released, this would be low on sophistication but would serve general use-case purposes and could be used for access to internet, including online search; another, a more high-end project with touch screen interface and high level of sophistication and wider applicability of tasks on a handset. The first one was junked right away after the unveiling of iPhone, and Google went all in on the second project. The outcome of this is the Android operating system, which has around 70 per cent market share today in the mobile operating system industry. Thus, the seeds for the success of Android were sowed in January 2007.
But this is only one half of the story. The other half is how the seeds of destruction of a few global big-tech giants of that period like Nokia and BlackBerry, too, were sowed on the same day. Between the unveiling of the iPhone and its launch on June 29, 2007, all kinds of views from industry experts and analysts made the headlines. That it would impact incumbents was one; that it is good for the incumbents, as it will broaden the ecosystem was another. As you would have it, not one of top executives of any of the leading handset/smartphone/mobile operating system companies — Nokia, BlackBerry, Motorola, Windows Mobile Operating system — acknowledged how disruptive the launch of the iPhone was to their business. Every one of them downplayed the threat.
In its quarterly earnings conference call in July 2007 right after the iPhone launch, to a question from an analyst on threat from iPhone, the Nokia management noted how they welcome competition as it makes them better. Then CEO of Microsoft, Steve Ballmer, infamously mocked the iPhone. When questioned on what was his reaction to iPhone, he responded with a laugh: $500…fully subsidized with a plan..that is the most expensive phone in the world..and it doesn’t appeal to business customers because it doesn’t have a key board. He also added: Right now, we are selling millions and millions and millions of phones a year.. Apple is selling zero phones a year (You can view this response of Steve Ballmer to iPhone in this video link https://tinyurl.com/msiphonereax).
Surprisingly, in the early phase, they appeared to be right if you were to look at the performance of their business and stocks (in 2007). Nokia crossed a market cap of $150 billion towards 2007-end. A significant majority of this value was derived from its handset/smartphone business, while a smaller part from its telecom equipment business. BlackBerry (called Research in Motion then) crossed $100 billion in market cap in 2007. These levels of market cap were amongst the highest in the world that time.
The unveiling of the iPhone was the starting point of a permanent tectonic shift in how not just the mobile industry functioned, but how the whole world functioned. Competitors had spectacularly failed to spot this.
By 2009-end after stocks recovered from the impact of the global financial crisis, the iPhone effect started playing out; and it showed in the weaker performance and stock prices of BlackBerry, Nokia and sales of Windows Mobile OS. By 2012, Apple was apparently raking in around 70 per cent of global mobile handset industry profits (versus zero till mid-2007) with just around 10 per cent unit share. The impact on competitors was destructive beyond what anyone fathomed in 2007.
Nokia’s handset/smartphone business was acquired for a mere $7.2 billion. This, too, was entirely written off in 2016 and the acquisition was deemed a failed experiment at Microsoft. Blackberry market cap is around $2 billion today, down by over 98 per cent from its 2007 peak. The handset business of Motorola, too, would have met a similar fate, if not for Google buying it for $12.5 billion in 2011. It’s important to note here that Google bought the business not because it saw great value in the handset business of Motorola, but because the company, being a pioneer in handset technology, held thousands of patents.
By 2011, the incumbents of the handset industry like Nokia, BlackBerry, Sony Ericsson and Apple as well, formed a unit named The Rockstar Consortium, loaded with handset technology patents, and used it to file patent infringement cases against Google to stall the progress of Android. Hence, the acquisition of Motorola was done by Google to primarily build its own stockpile of patents to counter The Rockstar Consortium. And it worked!
By 2013-14, the industry had transitioned to unlike anything it was in 2007. New names led the industry, while incumbents got wiped off.
In the 21st century, there are quite a few examples of how technological innovation and disruption rewired the path of certain industries and the future. The launch of iPhone and the denials and unpreparedness of other handset industry CXOs to acknowledge and adapt serves as a very good example to learn from. However, sometimes even the best can get uprooted, despite their intense efforts to evolve and adapt. Such could be the impact of the change. Investors need to be alert to that.
Note for investors
During times like the disruption we were alerted to last week, investing must be based on caution and factoring for multiple outcomes and not by ‘buy the dip’ mentality. Views from incumbent CXOs must be taken with a pinch of salt, as Warren Buffett famously said: Don’t ask a barber whether you need a haircut. If you look through comments of IT services industry CEOs over the last two-three years, there has generally been a trend to re-iterate how they are well positioned to benefit from AI, although underlying performance has hardly reflected that.
As compared to this, the SaaS companies have actually been delivering a good performance in recent years. Yet, their stocks have been routed. Following concerns on AI disruption, their stocks have significantly underperformed business growth. Recency bias of investors (on how business has grown over the last few years) is now getting replaced with fears of what AI disruption can do to future business prospects. For example, Adobe, after delivering 11 per cent revenue growth and 15 per cent net profit growth in the last one year and with a solid 30 per cent net profit margins, is today trading at a trailing PE of 15.5 times! On a forward PE basis Adobe trades at 11.4 times (see the chart above).
During such times, it can be an endless debate on whether stocks are cheap or not, which is why investors need to plan for multiple outcomes. For example, one outcome could be that the companies adapt, evolve, survive and grow, but at a lower pace of growth than what was estimated a year or two ago. In such an event, buying at low-teens PE or single-digit multiples may pay off. But there could also be an outcome, where some of the companies get impacted like the handset companies of the earlier decade. In such a case, no level of buying will be cheap. For example, between 2007 and 2011 as the valuation of BlackBerry fell from over 30 times to low-teens PE multiple, one Wall Street firm analyst called its valuation ‘theatre of the absurd.’ Yes, the stock was really cheap in theory, but still not priced for the disruption and continued to move more and more lower.
A word of caution
So, investors looking to buy the dip, must assess whether the stocks are priced for disruption or extinction and then place their bets cautiously. Currently, there is no one who can clearly predict what the outcome will be few years down the line.
In this context, it would be worth noting that Indian IT services companies are not priced for disruption, whichever way one looks at it. With lower revenue and profit growth and lower net profit margins versus some of the SaaS companies (see the chart above), they continue to trade at high PE multiples on an absolute as well as on a relative basis.
During the previous phase of disruption in the IT services industry that played out between 2015 and 2017 when cloud/digital transition upended the legacy business model of the IT services companies, TCS, Infosys, Wipro and HCL Tech bottomed at a trailing PE of 16.3, 13.9, 12.5 and 13.1 times respectively. Today, where the disruption and threat are significantly more and their businesses have been more severely impacted as reflected in financials of recent years, they trade at a higher PE (see the chart above).
There is dichotomy here and hence they do not offer value, given the disruption risks, even after the underperformance in recent years. At bl.portfolio, we have consistently maintained a cautious stance on Indian IT stocks, and we re-iterate that view.
Published on February 7, 2026