“AI Isn’t the Villain”: Sridhar Vembu’s Take on Why Tech Stocks Are Falling

When global software stocks plunged into bear market territory this week, the explanation arrived quickly and conveniently: artificial intelligence is killing traditional software.

Sridhar Vembu is not buying it.

As markets reeled on January 29 and 30, wiping hundreds of billions of dollars off the valuations of companies that only months ago were celebrated as AI winners, the Zoho founder offered a far less dramatic but more uncomfortable explanation. The selloff, he argues, has far more to do with decades of excess finally colliding with competition than with AI suddenly breaking the software business.

In Vembu’s view, AI did not cause the collapse. It simply removed the excuses.

A Selloff That Defied Logic

The scale of the market reaction was hard to ignore. Microsoft alone shed more than $400 billion in market value in a single session, its worst trading day since the early days of the pandemic. Software stocks across the board fell sharply, pushing sector ETFs into bear territory for the first time since the financial crisis.

What made the selloff unsettling was not weak performance. It was the opposite.

ServiceNow beat earnings expectations and still dropped nearly double digits. SAP exceeded forecasts and lost around 15 percent. Salesforce, Adobe, and Datadog all declined despite steady growth. Analysts summed it up bluntly: the results were good, just not good enough anymore.

That disconnect between performance and price is the heart of Vembu’s argument.

The Real Issue Isn’t AI, It’s Valuation

For years, enterprise software enjoyed a rare position in the global economy. High switching costs, sticky customers, and subscription pricing allowed mature companies to trade at valuation multiples more commonly associated with early-stage startups.

Vembu believes that era quietly ended some time ago.

He has repeatedly questioned why large, established software firms should command price-to-earnings ratios of 30 to 40 when most competitive industries eventually settle closer to 10 or 15. The recent correction, he says, is the market finally confronting that mismatch.

Investors are no longer paying for growth alone. They are questioning whether the business models themselves justify premium pricing in a world where alternatives are multiplying.

AI as an Accelerant, Not an Executioner

Vembu does not dismiss AI’s impact. He reframes it.

Artificial intelligence lowers the cost of building software, deploying features, and maintaining systems. That does not destroy demand for software, but it does intensify competition. When customers can achieve similar outcomes with fewer people, cheaper tools, or internal teams augmented by AI, the justification for high licensing fees weakens.

AI compresses margins by making competition faster and cheaper. It does not erase the need for enterprise software, but it strips away pricing power that many vendors took for granted.

That distinction matters. It separates a cyclical narrative of panic from a structural narrative of maturation.

Why Earnings No Longer Save You

One of Vembu’s sharper observations is that the pain is not confined to stock prices. In some cases, earnings themselves are under pressure.

Companies that relied on aggressive sales tactics, complex bundling, or acquisition-driven growth face a double hit. Valuation multiples are shrinking, and future earnings look less defensible as customers push back on costs.

When both collapse at once, the result feels existential. Not because the company is failing operationally, but because the financial logic that sustained it no longer holds.

The Quiet Opportunity for Indian IT Firms

While much of the discussion in Western markets focuses on what is being lost, Vembu points to what is being gained elsewhere.

As global enterprises reassess expensive software contracts, Indian IT services companies are well positioned to step in. Many already build, integrate, and maintain complex enterprise systems at a fraction of the cost of premium SaaS platforms.

AI strengthens that position. It allows services firms to deliver faster, cheaper, and with greater automation, while offering customers tangible savings rather than abstract promises of innovation.

Vembu estimates that enterprises could reduce software-related spending by 60 to 80 percent by shifting away from bloated licensing models toward leaner, service-driven architectures. That gap, he argues, represents a massive opportunity rather than a crisis.

A Market Rethinking, Not a Market Panic

From this perspective, the January selloff looks less like a verdict on AI and more like a long-delayed reckoning.

The market is no longer rewarding software companies simply for existing at scale. It is asking harder questions about cost, defensibility, and long-term relevance. That shift can feel brutal, especially after years of abundance, but it is also a sign of normalization.

Software is not dying. It is becoming ordinary in the economic sense, subject to competition, price pressure, and efficiency demands like any mature industry.

The Bigger Picture

Vembu’s argument is uncomfortable precisely because it lacks villains.

There is no single technology to blame, no sudden collapse in demand, no dramatic failure of execution. Instead, there is a gradual unwinding of assumptions that had gone largely unquestioned during the boom years.

AI did not break enterprise software. It simply made it harder to pretend that old pricing models could last forever.

For investors, that means recalibrating expectations. For software vendors, it means rethinking how value is delivered and priced. And for service-led economies like India’s, it may mark the beginning of a significant shift in where value is created.

The tech selloff of January 2026 may eventually be remembered not as the moment software died, but as the moment it grew up.