Software Dominance: Why SaaS Stocks Will Reign Supreme in the Age of AI
The tech industry has seen numerous transitions over the years, and one common thread is that software companies tend to capture long-term value. This pattern was observed during the internet and telecom boom, when hardware companies like Cisco and JDS Uniphase reaped profits during the build-out phase. However, it was the software application platforms built on top of this infrastructure that became the great compounding businesses of the next two decades.
A similar trend occurred during the early PC era, where Intel and hardware manufacturers dominated initially but eventually lost out to software companies like Microsoft. The company's competitive moat in software helped it capture most of the long-term economic benefits. This pattern repeated itself with the smartphone revolution, where Qualcomm and Arm did well, but Apple and Alphabet became two of the largest companies in the world due to their control over smartphone operating systems.
The same principles can be applied to AI, where Palantir (PLTR) has the potential to become one of the world's largest companies. The company is trying to control the AI workflow and application layer, making AI more useful in real-world organizations. Its AI platform gathers information from various sources and organizes it into an ontology that links data to physical objects, concepts, and processes.
Micrsoft (MSFT) has also been able to endure and become one of the biggest winners throughout various tech transitions. The company's AI assistant, Copilot, is seeing strong adoption, and its cloud computing economics remain strong, set to improve over time. It also owns a 27% stake in OpenAI, an important strategic AI investment.
ServiceNow (NOW) appears well-positioned to benefit from the growing number of AI agents out in the wild. Its platform is used to run organizations' entire software stacks, making it an important system of record and helping serve as the basis for its agentic AI orchestration platform, AI Control Tower.