Why Software & Money Stocks Dumped transcript

software got cooked today thanks to Meta and a lot of people are wondering Kevin you've been shilling Meta like crazy but earlier in this year you were also interested in software what's going on because today was one heck of a day for any kind of sticky products that are sufferers when people decide I want to save a little bit of money I'm going to think about switching products take a look at what was down today in what's being called the consumer Inertia basket.

Planet Fitness down today 1day change 9 and a half%. New York Times down 7.2. LPL Financial for tracking your portfolio and taking AUM fees on that for portfolio managers uh was down 7 12%. All State Insurance 5 1/2%. Schwab 6 1/2%. You name it. I mean all the way down here even like Netflix travelers into it into it 3.9 Sirius Sirius XM 3.3 progressive insurance 2.5 a trip advisor whatever you get the idea why what is going on with the software sector so I'm going to give you some facts first and then we'll go into a thesis so the first fact that you have to know on this giant whiteboard that I haven't written anything on yet is January 1st of this year.

Software was actually a relatively normal percentage of people's allocated portfolio capital. That's a really fancy way of saying how much money people put into software as a percentage of what they got. This is according to Goldman Sachs's Prime book. People were allocating about 7% to software on January 1st. So that's Jan 1. By February, uh, this got pretty nasty. Okay, by February, we fell down to 1.5%. A record low percentage of people's net worth allocated to software because everybody was freaking out about the clawed co-work moment and how software was going to get destroyed and eaten alive.

Uh, and now before the MetaMuse moment, we got all the way back up to 5%. So, this was in early September. Now, in fairness, around this moment right here in this February moment, we started getting interested in software and we talked about how we thought in the third or fourth quarter, we would end up seeing a resurgence in software stocks. We have. Here we are. We're at the end of the third quarter. Is it weird to say that in a month and sorry, in a week in like two days, we're in the fourth quarter already.

The third quarter is already almost over. You got October, November, December left. That's it. We are already going into Q4. It's freaking nuts. But anyway, so we called this software rotation up from from this bottom allocation. And that was right. That was the right call. But the problem is a lot of these stocks have now gone up, but but now they're starting to kind of bleed a little bit. and MetaMuse just kind of like kicked them down even more.

So, a lot of people are like, is this just another cycle where we're going in sort of this clawed co-work moment down again in software because of Metamuse? Now, is this a different kind of transition? What's going on here and why is it happening? So, I'm going to give you everything. I'm going to give you stats and I'm going to give you my thoughts on all of this because as always, my goal is just to save you time and get to the bottom line of this.

I also have this weird obsession where I actually like researching this stuff and hopefully you just like listening to it. And then we've got a symbiotical relationship. Although some people are like, "Kevin, just shut the f up and just tell me what you're going to say." Sorry. All right. This is sort of this has been historically my thesis when it comes to software. Uh, and we're actually going to update this sheet to show you how this sheet changes when we get into Meta because Meta's Meta Muse affects these companies very differently uh, than this sheet does.

So, this sheet was sort of the original 2026 February thesis. My thought was you had uh dirty buckets stocks that were like Adobe where dude I don't even need to open up Adobe anymore because boom AI can spruce up a photo for me, spruce up a listing picture or throw a design together for me. Right now this has just gotten worse. If you look at the latest claude design software, mind you, they partnered with Figma and I think that was a mistake for Figma, but anyway, they partnered with these companies and what they've now done is they've done this whole like framer website style integration right into Claude where you could share a design with other team members.

They can leave comments. We should change this. We could change this. Except now when people leave comments, you could literally just press boop. Okay, Claude, go do it. And then it does it and then it automatically updates the whole design for everybody. You don't have to share the link again. It's like it's really good. Why would you ever touch a company like Figma anymore? I mean, we tried understanding this in the course member live stream this morning and so we looked at the Figma earnings and we're like, "Bro, that pee pee is shrinking." Now, don't get me wrong, okay?

These people uh increased revenue. Their revenue went up 48%. Their gross profit went up 39%. So you add a little bit of PP shrinkage here. It's not that bad. Their gross margins are still at 83.7%. That's great. But here's what's problem what what the problem is. They had income from operations at the end of uh this is for the 3 months ending June 30th of $2 million. So they made $2 million. They were actually profitable for the first time uh in in in years.

They were profitable in June of 25 in that quarter ending. And then June of this year, they decided apparently to just go f all. Like I literally wrote that on the sheet. I'm just like they're like they must literally be saying to themselves, you know what? From profitable to f it. Because they literally went in a hole by $17 million because what did they do? They doubled their research and development because they realized they're getting screwed.

They increased their marketing by 59% which is more than their revenue. And they 2.7x their GNA. I guess the salaries got to go up for the executives because this ship is sinking and you might as well get as much of a salary as you can before the ship goes down. I guess that's one way to go down with the ship. Go down with the ship with a big fat golden parachuting salary, huh? Sorry, I didn't actually have that much nice to say about Figma.

I had very little nice to say about Figma. And this I mean based on what I'm seeing with Claude, why why would you use them? I'm sorry. I feel like they're dirty and and I really apologize to anybody who holds it, but like these three right here, I can't get myself to touch because I can't argue that there's any way to touch them. Now, I do think that AI brings to losses to Google, Microsoft, and Amazon. Now, I have exposure.

I'll tell you why I have exposure because I I I want to be as unbiased as possible. uh you know, Bing search, Google search, and Amazon search, I consistently think lose when it comes to artificial intelligence because AI is just giving you the bottom line. Bro, dude, buy this. Stop scrolling. Buy this. Okay, that was true of Gemini last November. It's true even more now with Metamuse. And we'll talk about that in just a moment.

Then you have a very interesting kind of transition that's occurring at like these stocks are pretty much dog stocks as as well. you know, they're like in the penalty box, but they have hope. Upwork, in it, and up uh UiPath, all three of them have the same exact thing happening. What's happening is every single one of these companies, if you read their earnings calls, which yes, that's what your boy Meet Kevin does for fun.

He reads the earnings calls over and over and over again. Anyway, what do we find when we read the earnings calls? Well, they tell you the following. The lowerend consumer, lower end, there we go. The lower-end consumer is like, "Yo, peace, man. I could do this crap for free. I could be my own Upwork agent. I could be my own tax return filer, and I don't need robotic path optimization or whatever. I got cloud." So, all the lower-end users are going, "Peace. don't need you.

And the upper end users who are like, "Hey man, I need to have books that are capable of being audited. I need to process payroll. I can't rely on Gen AI to operate my audited books or my payroll. Hence, you need something like in it or gusto, whatever it's called. Uh, I need legal compliance with hiring. So, I'm going to work through Upwork on purpose." So some douchebag, sorry I shouldn't say that. Somebody doesn't go, "Hey, you know, I was actually an employee at your firm.

Uh, you told me what to do and what hours to work there and you treated me like an independent contractor and now I'm going to sue you for hundreds of thousands of dollars. That kind of stuff works against corporations." And then they settle because, well, either they don't have insurance or they just didn't use something like Upwork in the first place. There's like an insurance element to using Upwork and not hiring people directly.

That's why some people use it, but it's not the lower end. Same thing with UiPath. You and I aren't using this stuff, but companies like hospitals or banks that need max compliance that are too broke to get in the door at Palunteer, they go use UiPath. You and I, we don't. So that's where these guys they are actively bleeding the lower end but they are actually gaining the upper end which is pretty remarkable. Uh then of course you have companies that have insulated insulative elements.

So remember over here how I said search is hurting these businesses. You do also have insulative elements that that insulate companies like Meta Metamuse uh insulation over at Microsoft with co-pilot to some extent. We're going to look at some articles in a moment about them. Uh and then of course you've got Amazon which also has its cloud and data center business which all of them do. They're all essentially a hyperscaler right those GPUs and that value from AI is a creative to them.

And so while they might lose a little bit over here they're gaining over here. And frankly you could put Google in that bundle as well. Honestly in fairness Google should be over here as well. It's not fair that I didn't put Google there. I apologize. Now, who doesn't get screwed by AI? Well, Apple Axon, mostly Apple, because frankly, you're probably going to be the future AI ecosystem where people are using artificial intelligence on the device that's in your pocket, the laptop that's on your desk, whatever.

Uh, you've got Axon, which is government artificial intelligence for police officers, right? Body cameras, report writing, uh, 911 dispatching, Done technology. This is pretty insulated because it's government insulation much like Palanteer has and then of course Palanteer itself. So that's been the thesis for this year. But things have changed with Meta. So I have a whole new sheet about other problems and other beneficiaries in this segment.

And so we're going to look at that sheet right after we go look at some of these news articles. Man, I bet you thought you were getting ready to skip. You're going to be like, "Man, this guy's going to pitch me something." Nope. Uh, so new data show that Anthropic, OpenAI, and other upstarts are eating into software budgets. AI providers such as OpenAI, Anthropic, Cursor, Sierra accounted for 8% of spending by Zip customers in the first 12 uh 12 months that ended August, up 1.4% from the prior 12 months.

In other words, what's happening is some of that like consumer grade spending or even enterprise spending that used to go to Adobe that used to go to Figma that used to go to in fairness into it on that tax that that you know lowcost tax return that money is going not away it's just going from into it to open aai or anthropic I mean we could do things we can create designs now with anthropic in 3 hours for an entire app, a whole website or whatever that would otherwise take a designer two months to put together.

Now, that's not offensive to them. We don't actually think they're losing work. We're just able to do more faster. Now, it's more than obviously just designing something. Anybody can go design something. Then, you actually need a dev team who can take the proprietary data you have, the proprietary insight that you have that actually makes your product unique and put it all together in a platform in a way that people actually care to use it.

Because otherwise anybody can make a nice design, right? Value is at this point beyond what AI could generate in terms of design. And a good designer now transitions to working with AI designs and the implementers, the UIUX coders essentially who are also being aided by AI. But some people still have to drive the boat, right? They might just have AI workers in the back, so to speak, whatever. But this is what we find at our company and I always like to add that insight.

Now what's happening is there's a lot of commentary about artificial intelligence on the consumer side now with Muse basically flowing into robbing uh companies like Airbnb or the booking.com industry uh whether that's Expedia or otherwise. And you're basically going in and saying, "Hey, we don't need to go on Door Dash anymore. We don't have to go on Airbnb. We don't have to go on these platforms and see their ads to pick what we want.

We have our platform of choice." And that platform of choice might eventually become more and more Chinese. I see. I mean, on Open Router, if you look at Open Router, Open Router usage right now is vastly Chinese. This is the scale. The red line right here is Chinese. The blue line is US. The little light blue line here is EU. And you can see this wedge is forming where the Chinese really in terms of downloads have somewhere between 80 to 90% of downloads.

They really are growing this wedge. They're winning here. And the companies that can implement those Chinese models and keep users on their platform, they're the ones that are winning spend. So, if Muse can use either its own technology or in the background switch you to a cheapo Chinese model or if Fable can do that, you know, like you you're paying to use Claude Fable over at Anthropic and then it's like, hey, you want to just put it on auto and we'll give you a really cheap LLM when we can get away with that in fairness to you and them.

Both of you win. You use fewer credits, if you will, and and they spend less money. Then you both win. You both get the same product. doesn't really matter if a Chinese model is feeding it. But what's happening now is as those platforms collect dollars, whether they integrate Chinese AI or not, companies that already are integrating Chinese uh AI or companies like Door Dash, Airbnb, Perplexity, Harvey, Cursor, they're all integrating Chinese AI and they're really platform agnostic.

They just want to get stuff done. Point of all that is eventually what we'll all go towards for most consumer purposes is what this will turn into is a fight for which app you open up right which app you open up you know whether that's claude whether that's Gemini whether that's Meta whatever or Perplexity whatever this is people aren't going to care whether it's a Chinese LLM or whatever they just want to get work done and whatever can get the work done and get the habit of the user are opening the app.

That's the software that wins. But we don't know what that software is right now. What we do know though is who so far look to be some of the losers. So there are two tables here. Loser 1.0 is the first table that we went through. That's where we went through Adobe Figma, Canva, portions of Google, Microsoft, Amazon less so because they are offset by these others. And then of course the the middle ground Upwork into a UiPath.

Fine. But then you have this bucket right here. This is the MetaMuse winners and losers bucket. So Meta Muse is becoming so good at shopping for people uh that they got banned from Amazon, which I think just creates the Striand effect. Frankly, more people are going to want their agents to run on Amazon and then you don't have to see all the sponsored links and the agent can actually in a realistic manner rather than having to scroll through 50 posts only to realize half of them are sponsored.

Your AI agent can do that for you. Eventually, AI agents will eventually win at shopping. We don't care about shopping. Usually, shopping can be fun. and you go to the mall, you can make an event out of it. But often times when we're busy at work, we're busy with kids, we're busy with school, whatever it is, dude. I just need a box of markers. I want the best deal and the best quality markers. Don't BS me. Just bottom line me, baby, and get it done.

That's what AI turns into, is a tool to help you get value. The faster you can get value, the better. Do you want to sit there and read 5,000 different Substack articles that are posted every single day? No. Ideally, you just pay one person to go do that for you and give you the bottom lines. Maybe, I don't know, make a video for you. [laughter] Now, the service providers with ads, that's what's cut off here. I don't know why it got cut off.

Whatever. Service providers with ads are going to lose a little bit here. Door Dash, Wingstop, Uber, Uber Eats, right? They lose a little bit because the agents can price compare much more easily. They lose the ad revenue and they lose their pricing power moat of being the app people are going to. If people are opening the Meta app instead of this app, they lose. Any companies with switching costs are losers. When you have something as prolific as a MetaMuse taking over right now, this means legacy banks, so Morgan Stanley and Goldman Sachs or whatever.

That's why they were down today, the LPL's because people look and go, "Wait, why am I paying 1% to a financial adviser? I can press a few buttons, have my Meta, whatever, send a letter to my adviser saying, "Hey, send all my money to my Robin Hood account." And guess what? Robin Hood's going to give me 3% just to deposit my funds with Robin Hood. Sure, they'll lock me up for 5 years, but whatever, man. S&P 500 and chill.

SPYM, baby. [laughter] That is not sponsored. I told you no sponsor in this. Um, but yeah, I mean, use spym instead of spy if you're going to long-term buy and hold options, you go spy. Okay, small detail. I don't, this is what problem with me is. I go down these tangents, but Hood could be a beneficiary of that. Obviously, to some extent, Anthropic and OpenAI are beneficiaries of that. Who else is a loser? Well, any moat that the airlines have with you, oh well, I want to use this company for my miles or, oh, I forgot to use my miles over here.

Well, you forgetting to use miles is the benefit to the airlines. Hood and or anthropic and opening eye, they actually help you on this. Now, this isn't as cleanly put together because honestly, travel should be up here as kind of like getting hurt. Like all these get hurt except for these guys. These guys win. So, let's make this a little bit more clear here. Okay, this is the hurt bucket. This is the hurt bucket. This is the hurt bucket.

And this is the W bucket is what I meant to do. And then of course it switched, but I think you you get the idea here. The other section is the W button. We'll open it back up again. All right, here we go. So, whatever. [laughter] See, this is why sometimes paper is nice cuz you just don't have to deal with the nonsense of the computer. People are like, Kevin, why are you using a printer all the time? Is it because you just you got a new printer and you want to use that?

No. Sometimes it's just nice to be able to hold up a clipboard, make a point, and be done with it. Uh, you know, like like look at this. Look at this. If I just had an AI that could do this. There we go. W there. I don't know why that was that hard. [laughter] Why was it that important anyway? But anyway, these guys benefit from switching costs and so does Meta. Meta belongs in this bucket as well. So, and that's really the topic of this whole video is Metam Muse is leading to this sort of revolution that we're seeing now where you are seeing these categories get hit.

Somebody was asking me in the chat this morning, Kevin, why are all these financials getting hit? Insurance, banking, because the legacy systems rely on you not realizing that you're earning 0% on your money. You got a big zero over here. They rely on the fact that they've raised your insurance rate 50% and they don't even you don't even realize you're not competitive anymore or they're not competitive anymore because you don't want to pick up the phone.

You just renew. You autopay. You forget about it. They get pricing power. They get margin that way. Okay. Uh you know this this portfolio thing like LPL, low review trades. Hey, your money's just sitting there in the S&P 500 anyway. What the heck? How much benefit are you getting? That's what these AI are now telling consumers. And that doesn't I'm not here to bag on financial advisors. I'm just here to say this is where agents are going to go, "Look, man, I could save you 500 bucks over here.

I could save you thousands of dollars a year over here. I could save you $5,000 if you moved your cash from your bank to this institution." Now, these AI are paying for themselves. And the beneficiaries of these are going to be companies who are willing to pay for those deposits like Robin Hood. and of course the meta, the anthropics, and the opening eyes. Everybody else loses pricing power. Uh, okay. I was just mad at that file.

Sorry. Anyway, so this is interesting, especially because this isn't anymore going to be, well, who's at the frontier? It's going to turn into which app do you open? And that at this point is just frankly anybody's guess. That's why there are a lot of people that are like, "All right, well, the sucking money is going to go into hardware, right? Then I don't have to guess what software is going to win." But that's why there's nervousness in software right now.

And it's worth understanding that as you're going around and investing. I mean, look over here. JP Morgan, Wells Fargo each fell 3%. Morgan Stanley, they climbed 2.9. Insure All State fell 5.5. Okay. S&P 500 financial index fell nearly 2% to close at the lowest level since July. Companies who help users book travel accommodations were also hit. In Europe, telecoms were hit. Gym memberships were hit. How often have you gone to the gym lately?

How often have you price matched what you're paying for uh you know T-Mobile when you could get a better deal at Verizon or whatever it is, right? Whatever you want. Those are really important questions. You go over here uh and you look and they blame Muse and the private enrolled app uh Instinct which Muse has really just taken public uh you know they're different products but Muse is really the desktop app that's crushing everyone here.

The Goldman Sachs inertia index suggests boom that's why that selloff has occurred. So this giant sell-off right here in inertia stocks is a, you know, a big oopsy dupsies right now because of these consumerf facing personalized AI agents. Now uh yesterday I made a video talking about the beneficiaries of the Metamuse app. I encourage you watch that. But here it is. Meta's Mute Metamuse now at 500,000 people try it out roughly tried it out roughly a week after launch including roughly 250,000 daily active users and users have submitted more than 2 million prompts.

I'd expect that's going to keep growing and of course there'll be some some churn as you know people download it, they use it once and they never come back. It's also pretty normal. We're all human after all. Uh but you know these are all things to consider you know and then of course people start debating oh well what's better GPT Astra or Opus or this that or whatever where's the spend going that's fine for now the Frontier is good for now but the more and more you research the more you're going to see that the moat just isn't as strong as it used to be [music] in our opinion you're maybe 3 to 6 months behind on the Chinese open weights compared to some of these frontier models and uh that's scary.

I've got some more posts on this in the research tab for anybody who's a course member along with uh how AI kitchens work. And I don't actually mean kitchens. It's actually a [music] piece on memory stocks. But anyway, topic for a different video. Thanks so much for being here. We'll see you in the next one. Bye. If you like that video, check this one out. I think you're going to love it. >> Why not advertise these things that you told us here?

I feel like nobody else knows about this. >> We'll we'll try a little advertising and see how it goes. >> Congratulations, man. You have done so much. People love you. People look up to you. Kevin Pafra there, financial analyst and YouTuber. Meet Kevin. Always great to get your [music] take.