After last year’s small-cap rally raised concerns that many tech companies were overvalued, some questioned whether these firms have a future if AI can successfully be used to replicate their work.
However, fund manager Forager Funds has argued that software companies are not unattractive due to an inability to compete with AI, but simply because of valuation concerns, which it says could ease this year.
Speaking to Investor Daily, Forager’s chief investment officer, Steve Johnson said tech companies are shaping up as a “really interesting theme” for 2026 as prices pull back.
It’s a bet the high-flying small cap fund has made before with companies which have ended up being some of its biggest winners – like sports-tech company Catapult and management software provider Bravura Solutions.
Last year, Forager’s $212 million Australian Shares Fund exited both of those two stocks in September and October amid worries that the small-cap rally had driven valuations to unsustainable levels. It paid off, with both companies bought cheaply and sold at peak prices – Catapult was bought at about 80 cents and sold for roughly $7 while Bravura was sold after its share price reached a five-year high.
For the year to 31 December, the fund returned 24.77 per cent overall versus returns of 10.5 per cent by the ASX Ords Accumulation index.
But now, Johnson said the price pullback across Australian technology stocks in the final three months of 2025 is a positive sign that further correction could be coming. And while he’s not quite ready to reinvest yet, he said the moment is getting closer.
“I’d like to see a lot of these share prices fall another 30 or 40 per cent from here and then I’d say you’re getting really well compensated for the risks,” he told Investor Daily.
The pullback seen in Australia so far is far less than overseas, which has experienced a bigger price correction. Johnson said he would be “very excited” if Australian ones went the same way.
Forager’s $257 million International Fund has already sniffed out three beaten-down global software stocks worth investment: US Sprout Social, British digital marketplace Auction Technology Group and HBX, a Spanish competitor to Australia’s Web Travel Group.
“The US market is just so momentum driven, when things are popular then their share prices go through the roof and then when they’re unpopular, it’s down 80 per cent.
“We see the same thing here but [Australian] stocks are down 50 per cent rather than 80 per cent. If they were down 80 per cent then we’d be getting very excited about them.”
Is AI a genuine threat?
On factors beyond valuation, he said the AI threat to software companies, as well as many other businesses, is largely “overcooked.”
“I’m not sitting here saying it’s not going to impact anything, it very clearly is, and we’re using it a lot in our own business.
“It’s all about trying to understand the competitive advantage that one particular business has and asking if that competitive advantage is under threat,” Johnson said.
He said the idea is that in a world where anyone can “vibe code” a website or app, the value of these companies is diminished. In reality, he argued that cost savings from building websites with AI is not the most valuable factor.
“If you could disrupt [a company’s] competitive advantage just by building a website, that would have happened a long time ago.”
For example, Johnson said that while he could try to “vibe code” his own accounting software to avoid paying for Xero, factors such as security, backups and ongoing improvements are just as important as cost.
Currently, Johnson said both the Australian Fund and the firm’s International Fund have near-zero exposure to AI-beneficiary companies.
“Our whole philosophy is to try and find things that are unloved and underappreciated. And I would say everything that is an AI beneficiary now is in the complete opposite bucket,” Johnson said.
That being said, Forager is not bearish on AI’s long-term return potential, unlike GQG, which has openly bet against the technology.
Johnson also cited gains in AI-related stocks owned by the fund, including US HVAC company Comfort Systems, which has tripled in seven months. He explained that like the rest of the small cap fund’s holdings, Forager’s investment choices are very much stock-specific.
Looking ahead, Johnson concluded that with tech stocks currently being “hammered”, companies that have long relied on stock-based compensation will be forced to tighten discipline and focus more on profitability – a possible incidental benefit.
“I think the investors like us that are starting to look at this space are not going to accept the expense of these businesses…They’ve been able to [get away with it] because the share prices have been so high and have just kept going up as long as revenue kept growing,” he said.
