AI Disruption Sends Legal Tech Stocks Plunging
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Investors are reassessing the landscape of legal technology as artificial intelligence advances, triggering a significant sell-off in shares of established software firms and data service companies. The downturn, which unfolded on Tuesday, reflects growing anxieties that new AI automation tools—particularly those developed by Anthropic—could fundamentally reshape the industry and erode the core businesses of major players.
The market reacted sharply to Anthropic’s latest move, with several prominent companies experiencing double-digit percentage declines. RELX Plc and Wolters Kluwer NV, both leading providers of professional analytics, each fell by more than 10%. Experian Plc, a credit-reporting firm, saw a 9.0% slide, while the London Stock Exchange Group Plc, Thomson Reuters Corp., Legalzoom.com Inc., and FactSet Research Systems Inc. all dropped around 10% or more. Broader market indicators also signaled investor concern, with the iShares Expanded Tech-Software Sector ETF declining as much as 4.4% and a UBS Group AG basket of European stocks vulnerable to AI disruption falling nearly 7%.
Anthropic Intensifies Competition in the Legal Space
The catalyst for this market correction was the launch of new capabilities for Anthropic’s Cowork tool, specifically tailored for the legal sector. “We view this as a sign of intensifying competition, and thus a potential negative,” noted an analyst from Morgan Stanley in a report on Thomson Reuters. This sentiment underscores a growing fear that Anthropic’s entry will disrupt the existing competitive dynamics.
The legal tech industry has already seen substantial investment in recent years, with startups like Harvey AI and Legora attracting significant funding. Harvey AI reached a valuation of $5 billion last year, while Legora secured funding at a $1.8 billion valuation. These companies have focused on automating routine tasks for lawyers, promising to alleviate “grunt work” and boost efficiency.
A Unique Advantage: Building vs. Relying on AI Models
However, Anthropic distinguishes itself from these earlier entrants. While firms like Legora rely on underlying AI models developed by companies like Anthropic, Anthropic builds its own customizable models. This vertical integration provides a distinct advantage, allowing the company to disrupt both traditional legal news and data services, as well as the emerging AI startups.
Anthropic’s website now features a legal tool designed to automate tasks such as contract review and legal briefing preparation. The company emphasizes the need for human oversight, stating that “all outputs should be reviewed by licensed attorneys.” The release of the Claude Cowork tool in January further amplified concerns about disruption within the industry.
Broader Tech Sector Faces AI-Driven Uncertainty
The anxieties extend beyond the legal tech sector. Last week, video-game stocks also experienced a downturn following Alphabet Inc.’s rollout of Project Genie, an AI tool capable of creating immersive worlds from text or image prompts. This demonstrates a broader trend of AI-driven disruption impacting multiple industries.
The current earnings season is revealing a growing divergence between software companies and the broader tech sector. So far, only 71% of software companies within the S&P 500 have exceeded revenue expectations, compared to 85% for the overall tech sector, according to data compiled by Bloomberg.
The market’s reaction reflects a growing recognition that 2024 will be a pivotal year for determining which companies will thrive—and which will falter—in the age of AI. “This year is the defining year whether companies are AI winners or victims, and the key skill will be in avoiding the losers,” stated Stephen Yiu, CIO of Blue Whale Growth Fund. He cautioned that “until the dust settles, it’s a dangerous path to be standing in the way of AI.”
The current market volatility underscores the urgent need for companies to adapt and embrace AI, or risk being left behind in a rapidly evolving technological landscape.
