:max_bytes(150000):strip_icc()/GettyImages-2256719650-6d1cd5eb4ecf4b898b87856f5b8c68ee.jpg "Wall Street Is Down on Software Stocks. This Expert Says That’s ‘Absolutely Wrong’")
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Key Takeaways
- Software stocks should rebound when Wall Street realizes they “hold the key” to unlocking AI’s benefits, according to the founder of tech-focused private equity firm Thoma Bravo.
- The software industry has been hammered by concerns about AI’s uncertain commercial potential, as well as fears that the nascent technology will upend established business models.
Anxious software investors worry that artificial intelligence is disrupting the multi-trillion dollar industry. One veteran tech investor says those concerns are misplaced.
Orlando Bravo, founder and managing partner of tech-focused private equity firm Thoma Bravo, on Wednesday called the narrative that AI is going to eat software “absolutely wrong,” in an interview with CNBC. The reason: They know what the companies and industries they serve need to succeed—and are still positioned to deliver it.
“The franchise value of most software companies is [their] deep domain knowledge,” Bravo said. That, he said, situates software companies at the intersection of AI capabilities and enterprise needs.
“If you want to see wide adoption in the enterprise of AI, these are the companies that will do it,” Bravo said. “These are the companies that hold the key.
Why This Is Important
Artificial intelligence hype has been the driving force behind stock market returns for more than 3 years. Investors have recently shunned software stocks in favor of industries with more concrete evidence that the AI boom is adding to the top and bottom lines.
The software industry has recently been dogged by concerns that incumbent software’s share of enterprise IT budgets will shrink as companies dedicate more resources to AI-native applications. Investors are also concerned that the industry’s profit margins will narrow as competition ramps up.
Those concerns have created a chasm between the tech sector’s best and worst-performing stocks. The PHLX Semiconductor Index (SOX) is up about 12% this year—after rising 42% last year—while the iShares Expanded Tech-Software Sector ETF (IGV) is down more than 10%.
Shares of software giants Applovin (APP), Intuit (INTU), and ServiceNow (NOW) are all down about 20% so far this year, making them the S&P 500’s worst performers. Meanwhile, shares of flash memory device maker Sandisk (SNDK) have doubled in the past three weeks.
Analysts expect spending on AI infrastructure will continue to lift semiconductor stocks this year. A shortage of memory and data storage hardware could sustain the momentum in stocks like Sandisk and Micron (MU), according to a recent Bank of America note. Evidence that tech giants will continue to spend aggressively on data center infrastructure could re-energize shares of Nvidia (NVDA) and its AI chip competitors like Broadcom (AVGO) and Advanced Micro Devices (AMD), according to the analysts.
Software may have a tougher year ahead, but investors shouldn’t write the industry off entirely, according to Oppenheimer analysts. Investor sentiment toward software stocks could improve this year if AI initiatives across the economy boost the industry’s top line and backlog growth, or if software companies themselves demonstrate AI is boosting efficiency and improving margins, the analysts said.
Bravo said he’s already seeing evidence AI is doing that. “Many of our companies just finished their year in December,” he said, “and we saw a big boom in the quarterly bookings of these companies, partly because of take off in AI.”
