Technology: The software market – it’s not all doom and gloom
This article explores how AI-driven shifts in competitive dynamics are reshaping software valuations, and why investor focus is moving from horizontal platforms toward defensible, vertical‑specific software assets.
Price-to-earning (PE) ratios for many listed software companies have compressed over the past 12 months; while reflecting a combination of macro-pressures, a large part of the narrative and concern sits around how AI will re-shape competitive dynamics. At Armstrong, we believe this isn’t a structural weakness in software, but more a re-pricing of differentiation, particularly across horizontal software categories.
Horizontal software are tools that are applicable across a diverse range of end-sectors (e.g. HR or CRM) therefore have broad market appeal and an enticing Total Addressable Market (TAM). However, AI is lowering barriers to entry in this category; tools that were once defensible are being replicated or augmented by AI-native solutions. As a result, investor confidence in their ability to sustain earnings, especially if they lack a clear proprietary data or AI monetisation strategy, has declined. This has led to a greater focus on vertical-specific software with clear competitive moats, which has been the primary area of deal activity for Armstrong in the first quarter of 2026.
Vertical-specific software providers which are focussed on deeply embedded solutions within specific sectors (e.g. financial services, security, facilities management, healthcare etc) appear to remain structurally advantaged. These are the key themes and questions we use in commercial due diligence to test the resilience and defensibility of these assets:
- Mission-critical products are harder to replace
How embedded is the software in day-to-day operations (e.g. compliance, scheduling, billing)? What would it take for a customer to switch (data migration, retraining, risk, downtime, high costs)? Does usage deepen over time, increasing reliance on the product? - Futureproofing the core product is key
How well does the product serve the end-customer pain points? How well aligned is the product roadmap to the market/competitive landscape? Is the roadmap widening or deepening the moat and/or differentiated offering? - Industry know-how creates stickiness
Does the software reflect critical industry workflows or just digitise basic tasks? Does it help customers understand best practice or benchmark against peers? Would customers lose market best practice insight, not just functionality, if they switched? - AI is a clear opportunity, not just a threat
Where can AI directly improve outcomes (e.g. automate tasks, predict issues, support decisions)? Are these tied to important, repeatable workflows? Can the company charge more or sell more as a result? - Proprietary data strengthens the advantage
What unique data does the business collect through usage? Is this hard for others to replicate? Does this data help improve the product over time? Does the data form the foundation of future AI use cases? Would customers lose meaningful insight or decision-making capability if they attempted to replicate this internally using AI?
In conclusion, while headline PE ratios may have softened, this reflects not a loss of confidence in software, but a shift toward differentiated, vertical-specific assets with durable competitive moats, resilient to AI-driven commoditisation and well-positioned to harness AI in targeted use cases.
If you would like to explore the key commercial questions that help assess the resilience and competitive moat of vertical-specific assets, please contact Anjali Obhrai.
Anjali Obhrai
aobhrai@armstrong-ts.com
+44 7909 094 604