Zoho founder Sridhar Vembu has said that falling software stocks are creating a major opportunity for Indian IT services companies, as he questioned high valuations and business models of large global software firms. In a post shared on social media platform X, the Zoho founder said many software companies were “massively over-valued” and are now seeing sharp corrections. Vembu’s post came after Microsoft witnessed its worst stock market days recently after it lost $400 billion in just a few hours as the company’s stock plunged. In the post, Sridhar Vembu said software stocks are “coming down hard” because many mature software companies were trading at price-to-earnings ratios of 30 to 40, which he believes are unsustainable. According to him, valuations in the range of 10 to 15 are more realistic for such firms. He also said that earnings at some large enterprise software companies could come under pressure, which would further hurt their stock prices.Referring to companies such as Salesforce and ServiceNow, Vembu said these firms have been able to charge high prices for their products so far. He added that this pricing power may not last, and when both valuations and earnings fall, it could feel like a major shock for investors.While some market observers argue that artificial intelligence could “destroy” the software industry, Vembu said he does not fully agree with that view. Instead, he described the current changes as a result of increased competition, which AI may accelerate.

Role of AI and opportunity for Indian IT firms

According to Vembu, AI could lead to a much lower cost of enterprise software, even if it does not completely replace large software platforms. He said it is possible that some enterprise applications may be built in-house or through IT services firms at a lower cost.Vembu said this creates a clear opportunity for Indian IT services companies. He noted that these firms can offer to replace expensive enterprise software platforms, migrate customers to new systems, and help them save between 60% and 80% on costs. He described this as a “huge opportunity” for Indian IT companies to grow at the expense of large global software vendors.His comments come at a time when global tech stocks are facing pressure and companies are reassessing spending on software and technology services.

Read Sridhar Vembu’s post

Software stocks are coming down hard. I see it as massively over-valued companies coming down. But the quoted post argues “AI based code will destroy the software industry”.First, I don’t see why any mature software company should trade at 30-40 PE. I think 10 or 15 is where they will go. I also think the E will drop – Salesforce or Service Now have gotten away with exorbitant prices so far and they won’t be able to. When they lose their high PE and their E also drops, it would feel like death – given that companies like Salesforce are merely “use high flying stock to acquire start-ups and then use high pressure sales teams to upsell” they won’t be able to get away with that model very long. That is the functional equivalent of death.But is that due to AI? I like to think it is good old-fashioned competition.AI will accelerate the competition. But will AI mean all enterprise apps will be done by in-house IT or IT services firms at very low cost? Possible but my bet is “far lower cost of enterprise software”. In any case, Indian IT services firms can prosper at the expense of Salesforce etc by offering to replace Salesforce and migrate the customer and save them 60-80%. That is a huge opportunity for IT services firms.