'Kind of remains a bit of a risk right now for the entire sector': Ender on AI's effect on software

Key Concepts

• Software Sector Sentiment: A state of cautious stabilization, where the market is balancing AI-driven growth opportunities against fears of "disintermediation" (the risk that AI models might replace existing software application workflows).
• Workflow Automation: The core business model for companies like Pega and Appian, focusing on complex, multi-step processes in regulated industries.
• Agentic Capabilities: The integration of AI agents into software platforms to perform specific tasks within a larger, human-overseen process.
• Enterprise Suites: A strategy used by companies like Box to bundle features and upsell customers to higher-tier, higher-margin products.
• Disintermediation Risk: The market concern that generative AI models could eventually render specialized workflow software obsolete by performing tasks directly.

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1. Market Outlook for the Software Sector

Steven Enders, VP and Senior Equity Research Analyst at Citi Research, characterizes the current software sector as being in a state of "wobbly" stabilization. While the sector has found a potential bottom, sentiment remains fragile and highly sensitive to headlines regarding AI. The primary tension lies between the potential for AI to drive growth and the fear that AI models might bypass traditional software platforms entirely.

2. High-Risk Buy: Pegasystems (PEGA)

• Core Value Proposition: Pega specializes in automating complex, 100+ step workflows, particularly within highly regulated sectors like banking, insurance, and government.
• AI Strategy: Pega utilizes its "Blueprint" strategy (Generative AI) to simplify the customer on-ramp process, allowing users to deploy complex workflows more efficiently.
• Investment Thesis: Despite market fears of AI disintermediation, Pega’s focus on complex, regulated use cases makes them less susceptible to being replaced by simple AI models. The company is seeing an acceleration in Annual Recurring Revenue (ARR) and Annual Contract Value (ACV), which is expected to continue through the latter half of the year.

3. Appian Corporation (APPN)

• Market Position: Similar to Pega, Appian provides an application platform for automating complex workflows.
• Key Growth Drivers:
  • Government Contracts: Appian has significant exposure to the federal government (30%+), highlighted by a $500 million Enterprise License Agreement (ELA) with the U.S. Army.
  • AI Adoption: The company reported $100 million in ARR specifically from its AI tier, with over 1,000% growth in AI usage in the most recent quarter.
• Perspective: Enders argues that the market underappreciates Appian’s fundamentals. He notes that government efficiency initiatives (e.g., DOGE) serve as a tailwind for their platform, and the company is successfully proving that AI is a growth engine rather than a threat to their business model.

4. Box Incorporated (BOX)

• Growth Strategy: Box is successfully executing an "enterprise suites" strategy. Their newest tier, launched roughly a year ago, already accounts for 10% of revenue despite only mid-single-digit penetration across their customer base.
• Upsell Potential: With 70%+ penetration of their existing suites, there is significant room for further revenue uplift (estimated at 30–40%) as they migrate customers to newer, AI-integrated tiers.
• Competitive Moat: Enders emphasizes that Box’s focus on security, governance, and file management makes their content-centric platform difficult for generic AI models to replicate, mitigating disintermediation risks.
• Partnerships: Box is actively integrating with major AI model vendors, including Anthropic and OpenAI, to position itself as a central content strategy layer for organizations.

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Synthesis and Conclusion

The software sector is currently navigating a transition period where AI is both a threat and a catalyst. The common thread across Enders' picks—Pega, Appian, and Box—is that these companies are successfully integrating AI to enhance their existing, complex workflows rather than being replaced by it. By focusing on regulated industries, government contracts, and secure content management, these firms are building "moats" that protect them from the risks of AI disintermediation. Investors are advised to look past the broad market sentiment and focus on the accelerating ARR and successful product-tier adoption metrics currently being reported by these companies.