AI = Why are these tech names dropping…

Happy Friday everyone. Busy week at Avory as earnings season continues. Ironically we heard thesis confirming results from Zillow, Paycom, Omnicell, yet reactions have not been great. Currently, AI has introduced a level of noise across market segments that feels wildly exaggerated (see the first image below). In many ways, the "AI will replace everything" sentiment mirrors the 2020 belief that the entire global workforce would never step foot in an office again.

I’ve put together some thoughts on the current state of tech and software, specifically addressing:

• What can slow down the "everything will be AI’d" narrative.

• and why Avory is uniquely positioned to thrive even in the extreme scenario where AI disrupts all of software.

Outside that and important but feels irrelevant this week but jobs came in at 170k+ job adds, which again if you look back at our annual letter, we stated how jobs will accelerate in 2026. Also Bill Ackman made a $2B investment in Meta this week (one of our holdings), stating it is the best AI name, something I have been stating for nearly 2.5 years, and now people believe it. Sometimes narratives take time.

Here is the summary if you want just that:

• +~170k+ jobs added

• Zillow revenue grows +16% Y/Y (rentals +39%)

• AI narrative analysis

• Zoom 10x

This image basically summarizes the last 3 weeks. AI controlling the narrative in markets.

This time, it was the announcement of a new AI-powered tax planning tool within the financial services ecosystem, and within hours brokerage stocks sold off sharply. Charles Schwab, LPL Financial, Raymond James, and Stifel all dropped and have continued to fall since.

There was no earnings miss and no guidance cut, just perceived disruption. Over the last three weeks, the pattern has been consistent: a new AI headline hits, the market assumes disintermediation, and stocks sell first while analysis comes later. We don’t own those but they have no business going down. It has very much been a shoot first, ask questions later environment.

At the same time, strong earnings results have not been rewarded across many sectors. Companies can post solid growth, stable margins, and constructive outlooks, yet the stocks struggle to gain traction. I think that’ll change and I share how and why below but unless you own something clearly defensive like McDonald’s or Walmart, the last couple of weeks have felt disconnected from fundamentals.

I agree with Orlando Bravo from Thoma Bravo. Here’s what he just stated.

Now I wanted to write a more complete piece today on AI and how we think the market, particularly in tech, can climb the wall of worry.

First, AI is not a passing theme. We are not going to stop talking about it this year or next year. It is becoming embedded in how companies operate, how software is built, and how time is allocated across teams. This is not a feature cycle. It is a structural shift in productivity and workflow design. We use it a lot and we have talked about this for a long time and we believe we are well positioned for that world.

We think our portfolio is well equipped to thrive in an AI world. Why tho?

For one, our largest holding is Zoom. Zoom has $8B, no debt, is seeing growth as Zoom Phone and Zoom Contact Center perform well. But that is not the story I wanted to bring up.

If we extrapolate the idea that AI eats software, then Zoom could be worth many multiples of where it trades today. 10x more in an extreme scenario. On a 20% holding, that is 200% to the portfolio. Meaning we have a deep out-of-the-money call option on frontier AI concentration.

Here’s some math. Zoom invested $51M in Anthropic, which is the leading frontier AI lab. Here you see they are gaining massive share. They also have investments in Perplexity and Coreweave, but that’s for another day.

That investment may look small in isolation, but today that investment is worth around $3B.

Let’s take the extreme case to understand the asymmetry here.

If AI meaningfully displaces large portions of traditional software and even parts of knowledge work, the value capture at the model layer could be enormous. For simplicity, assume the U.S. opportunity ultimately consolidates into a $20T duopoly. If Anthropic represents half of that structure, that implies a $10T company, not far off from today’s value of the chip company providing GPU’s.

In that outcome, Zoom’s stake becomes highly relevant. For the $51M investment it would be worth $100B in a $10T Anthropic scenario. If ownership were in that range and survived dilution over time, the Anthropic stake alone could be worth roughly 10x Zoom’s current equity value.

From a portfolio construction standpoint, the implications are material. If Zoom represented 20% of a portfolio and that position increased 10x, that component alone would translate into roughly a 200% contribution relative to the original portfolio base.

Of course, this is an intentionally exaggerated scenario. It assumes AI captures trillions in equity value, the market consolidates into two dominant labs, Anthropic secures half that value, and Zoom’s ownership remains meaningful.

That is not a base case.

The broader point is not that this outcome is inevitable. It is for the doomers on AI winning everything, we have an upside option in our portfolio that would significantly outweigh technological shocks.

Now what can slow down the narrative out there and relieve some of the pressure AI is infusing in minds.

Here’s the summary :

1. CapEx Growth Moderates: Market says no more. ie 2023 year of efficiency.

2. Valuations Reset: Lower multiples embed downside and create potential support.

3. Positioning Washed Out: We are already seeing this.

4. Integration Shows Up in Earnings: Retention, upsell, and AI revenue can reclassify “losers.”

5. Buybacks Provide Support: Capital returns reinforce confidence at lower valuations.

6. Security Shock Risk: We will hear of AI related cyber risks.

7. Macro Stability Helps: A resilient economy reduces urgency around the bearish thesis.

Right now, the dominant tone around parts of software and application-layer businesses is defensive. The story suggests hyperscalers are spending aggressively, infrastructure is winning, software margins and seats can come under pressure, and traditional seat-based models are vulnerable.

So far we have not seen that. If anything we have seen churn and retention improve and these models have been a round since 2022. Yes models are improving, but there is little evidence of weakness in software land…

However, that framing though carries weight because the CapEx numbers are real and the technological change is real. Now narratives can turn when expectations start to recalibrate. So lets dig into how or why they recalibrate.

1. One of the clearest catalysts for a recalibration would be a deceleration in AI-related CapEx growth.

Just a couple of years ago, hyperscalers were criticized heavily for aggressive investment spending. Now we are seeing Oracle and Microsoft stocks get hit hard, and they could be the first to adopt a more measured tone. I am not talking about a collapse in spending or a reversal, simply a moderation in the rate of increase. Again, AI is real, but if hyperscaler CapEx shifts from extraordinary acceleration to a more sustainable pace, the optics change quickly. The narrative moves from an AI arms race to capital discipline. We saw this dynamic in 2022 when investors shifted their focus back to returns and efficiency. Remember? So a normalization in spending growth could actually stabilize sentiment around software.

2. Valuation also quietly reshapes perception.

Multiples compress before fundamentals fully confirm any reality. When software companies trade at levels that already assume slower growth, margin pressure, and competitive risk, the bar lowers. Remember valuation is a proxy for durability. Once the market stops paying for peak outcomes, the downside becomes more limited. That does not guarantee upside, but it changes the psychology from panic to reassessment. Look how earnings in blue are pushing higher, yet multiples fell below the 2022 rate hike fears! Adobe, Salesforce, and many others are trading near or below their all-time low multiples.

3. Positioning adds another layer.

If fund manager exposure to certain software segments is already near historic lows and much of the selling has cleared, incremental downside becomes harder to generate. Markets often stabilize not because news improves, but because sellers exhaust themselves. At that point, even modest improvements in fundamentals or messaging can drive a re-rating. You can see here that they are very much out of software. Momentum traders get out of the way while long term holders remain.

4. Ultimately, fundamentals determine whether the “non-beneficiary” label sticks.

If companies begin reporting improved retention, AI-driven upsell, higher ARPU, or incremental revenue tied directly to AI features, the classification shifts. The market does not require explosive AI revenue overnight. It needs evidence that AI is enhancing workflows rather than displacing them. As earnings transcripts reflect integration instead of disruption, the tone can shift. Look at ServiceNow, seeing improved retention. Need more of this.

5. Buybacks and capital return policies can reinforce that stabilization.

One thing to consider is we still are not passed the bulk of software earnings, and therefore they are not in their buyback windows yet. So we could see stability from that. companies cannot buyback shares roughly 30 days prior to earnings.

6. Macro conditions matter as well: 2026 IT spend growth = highest reading since Jan 2022 In a resilient economic backdrop, enterprise IT budgets are much less likely to get slashed. That matters. Stability in the economy is generally a positive for tech, because it reduces the odds that companies start cutting spend across the board.

Right now, it feels like the market may be mixing macro fears with AI anxiety, and I do think that has been partially responsible for some of the recent weakness. But here’s the interesting part. The latest ETR survey shows tech spending is actually accelerating and is at its highest pace since 2022.

7. There is also a less discussed but very plausible 2026 risk: security.

As AI tools scale across enterprises, the attack surface expands. The vulnerability does not need to originate in the model weights themselves. It could come from prompt injection exploits, data leakage through integrations, orchestration layer weaknesses, or autonomous agents interacting with external systems. If a highly publicized AI-related breach occurs, adoption may not reverse, but it could slow. Enterprises would move from aggressive rollout to controlled pilots. Legal, compliance, and board oversight would intensify. I think we see more of this.

Interesting though, such a security shock could strengthen long-term defensibility of the incumbents. In a more cautious environment, enterprises consolidate around trusted providers with robust compliance frameworks and monitoring systems.

The bearish AI story persists only if fundamentals confirm the worst-case version of events: accelerating CapEx with no revenue realization, structural margin compression without offset, meaningful seat declines, and valuations that still assume peak outcomes. Some of those remain possible. But markets do not require perfection to stabilize. I’d say they require expectations to become more reasonable and that has happened.

So look we are well positioned for the AI era. The AI narrative is not ending. The turn for perceived non-beneficiaries likely comes through decelerating extremes, disciplined capital allocation, valuation resets, clearer earnings evidence, and perhaps even a phase of security-driven issues. Not a single catalyst, but a gradual shift in framing throughout 2026 as the market moves from extrapolating disruption to thinking through it more.

That is all folks. I will leave Zillow earnings here. +16% growth, guided to same growth in 2026, margins to improve by another 2% this year, and rentals growing +39% Y/Y. Thesis is confirmed, stay the course!

Have great week/weekend.

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About Avory & Co.

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Avory specializes in high-conviction equity strategies, emphasizing Secular Growth and Transformation Stories driven by exceptional teams. Data guides decisions. We cater to high net worth investors, family offices, and institutional investors. Note: This information doesn't constitute a recommendation to buy or sell any mentioned securities. Avory is based in Miami, Florida with clients all across the globe.

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Disclaimer: Not a recommendation to purchase or sell any securities mentioned. This is for educational purposes only.