Why Investors Are Misreading the AI vs Software Story

I’m noticing a growing disconnect in the markets today. My investor friends are acting schizophrenic—pouring capital into companies growing 40% to 50% a year, like Figma, while turning their backs on firms growing 10% to 15% annually, like Adobe or Workday. I guess steady growth, billions in free cash flow, and entrenched customer bases aren’t exciting enough anymore.

Take Workday. Granted, its stock has been flat for five years, yet it’s generating over $2.5 billion in free cash flow and still expanding revenue at a double-digit clip. My friends seem to be tossing out solid businesses like old cargo, assuming companies like Workday or Salesforce will be swept aside by the AI wave.

That’s a mistake.

These companies—Workday, Salesforce, Adobe—own the customer. The idea that global enterprises like Procter & Gamble, Nike, or Pepsi are going to rip out their ERP systems that took decades to deploy and replace them with some shiny new AI startup is pure fantasy.

Enterprise software is sticky. Integration is costly. Trust takes years to build.

And it’s not as if these incumbents are sitting still. They are building their own AI assistants and tools. These companies will continue to innovate and reinvest in AI and will likely benefit from this transition, not be destroyed by it.

The Moat Isn’t Code—It’s Distribution

Where my investor friends really get it wrong is in a fundemental misunderstanding of what makes software companies valuable. They think software is like semiconductors—built on deep, defensible tech. It isn’t. For software companies, the real moat isn’t the code; it’s the customer relationships, distribution channels, and trust.

I invest in a small business in Minnesota that builds Chamber of Commerce software. It’s a $40 million company, profitable, growing nicely. Could Microsoft crush us if they wanted? Sure. They could assign 100 engineers to the problem and out-code us in a week. But they don’t. Why? Because software is fragmented across tens of thousands of micro-verticals. No one can attack everything at once. Success in software has always been more about distribution than R&D.

The Forgotten Strength of Incumbents

In public markets, fortunes are made by buying great franchises when they’re out of favor. Companies like Salesforce and Workday have loyal customers and high retention. As long as they keep innovating, they’re well-positioned to thrive in the next cycle.

Remember when e-commerce took off in the 1990s? The winners weren’t all new startups. Many of today’s top online retailers—Home Depot, Target, Walmart—were around back then. Sears and Kmart didn’t lose because they were old; they lost because they stopped adapting. Walmart became a tech company in disguise, hiring software engineers and building infrastructure.

Innovation, not age, determined survival.

The same will be true for software. Those who evolve with AI will endure and even expand their lead.

The Early Innings of AI ROI

Right now, AI’s impact is still on the fringes. Enterprises are experimenting, not overhauling. CFOs are asking the right questions: how much will this cost, and when will it deliver real ROI? It’s the beginning, not the end, of the adoption curve.

So yes, AI is transformative—but not in the way some of my investor friends think. The winners won’t just be flashy startups. Many incumbents will absorb AI into their products, leveraging their scale, distribution, and customer trust.

In other words: don’t write off the old guards just yet. History shows that innovation rewards those who already have the customers—and the discipline to keep earning them.