Hyperscalers Reign Supreme, But Undervalued Software Giants Offer Attractive Value

Constellation Research Chairman Ray Wang recently argued that the AI capital cycle has created two distinct groups of megacap companies: hyperscalers and enterprise software names. Hyperscalers, such as Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Alphabet (the parent company of Google), are seen as having a clear path to AI dominance and have been rewarded with strong growth in their cloud computing businesses.

Wang pointed out that these companies generate double-digit cloud growth driven by AI spending, but are approaching negative free cash flow due to massive capex investments. He noted that Amazon's AWS grew 37% year-over-year in Q2, its fastest in 18 quarters, while Microsoft's Azure crossed $100B in annual revenue for the first time.

On the other hand, Wang sees enterprise software companies like Salesforce (NYSE:CRM), ServiceNow (NYSE:NOW), and Adobe (NASDAQ:ADBE) as undervalued. These companies have been beaten down despite growing cash flows, with Salesforce's Q1 FY27 report showing Agentforce and Data 360 combined ARR of nearly $3.40 billion, up over 200% year-over-year.

Wang praised ServiceNow's operating model, noting that it has achieved 24.5% growth and is on track to hit the Rule of 60. He also highlighted Adobe's AI-first ARR exceeding $500 million. With their forward P/E ratios compressed relative to their AI-era revenue growth, Wang sees these companies as attractive investments.