AI Bubble Fears Could Boost Software Stocks Amid Semiconductor Decline
The recent decline in semiconductor stocks and hyperscalers has sparked concerns about an AI bubble. The promise of productivity improvements from AI has driven significant spending on technology, including new data centers and equipment. However, market fears have grown amid doubts that this investment will pay off in the long run.
Software stocks were initially hit by fears that AI services could cut into their growth. Analysts re-rated earnings due to unpredictable future growth, causing a 30% drop in the iShares Expanded Tech-Software Sector ETF (IGV) from January to April. While software stocks have bounced back, there are still undervalued companies.
If there is an AI bubble, those companies hit hardest by the initial sell-off could benefit. The fear of AI disruption has left a significant overhang on stock prices, and if this is unfounded, software stocks could rise. Additionally, software companies integrating generative AI tools may be able to access compute power at lower costs.
Two large software companies, Adobe (ADBE) and Salesforce (CRM), are trading at attractive valuations despite fears of slower growth. Both have solid free cash flow and are using AI to improve their products, increasing their utility and expanding their moats compared to smaller competitors.