Why IT Stocks are Falling

#2 The Anthorpic Effect

US-based AI startup, Anthropic, recently launched new workplace productivity tools capable of automating complex tasks like legal contract reviews and compliance.

This has sparked deep investor anxiety that AI is moving from being a tool for IT companies to a competitor of IT companies, potentially eroding the pricing power of traditional service giants.

India is reportedly the second-largest global user of Claude AI, with a high proportion (50%) of usage dedicated to software development, UI design, debugging, and code tasks, far above global averages.

Anthropic's tools aren't just chatbots - they're being adopted for real technical and software development tasks. This has led to concerns that the linear billing model of Indian IT firms - clients are billed based on the number of hours worked - will become obsolete.

For decades, Indian IT grew by hiring more people to do more work. Now AI is a serious threat to that business model. If an AI agent can perform the tasks of five junior analysts, a client will no longer pay an IT firm for those five seats.

#3 Broader AI Concerns

Long-term investors are concerned that the revenue growth of Indian IT companies will be affected by the rise of AI.

The ever increasing uses of AI is directly tied to the slowdown in technology spending in the western world. Partly this is explained by macro factors but the widespread use of AI is also playing its part.

Across industries, clients of Indian IT companies are shifting their focus from relatively simple AI use cases to more complex AI applications to justify their return on investment.

Indian IT companies have invested considerable time and money to get the entire workforce AI ready so as to be prepared for this disruption. The industry's future revenue growth will depend a lot on how it fulfils the demand for AI-related services in the face of intense competition.

Conclusion

Investors considering IT stocks should ideally broaden their horizons. Consider technology stocks as a whole, instead of limiting one's options to just software.

Technology stocks are not just limited to the IT industry but encompass many other new technology company stocks. Many other industries make up the technology space and companies are sprouting up in defence technology, semiconductors, and sustainable technology.

These are also newer fields like cybersecurity, AI, and IoT as well. Technology applications are almost limitless and expanding into different areas.

Thus, keeping an open mind and digging deep into the ecosystem will likely result in more opportunities for an enterprising investor.

Investors should evaluate the company's fundamentals, corporate governance, and valuations of the stock as key factors when conducting due diligence before making investment decisions.

For more details, check out our IT sector report.

Also, check out Equitymaster's stock screener to find the best Artificial Intelligence stocks in India and the top Internet of Things (IoT) stocks in India.

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