As US Chip Giants Face Challenges, Some Turn to Software as the Next Major AI Opportunity – One America News Network
By Lisa Pauline Mattackal and Johann M Cherian
March 6, 2025 – 7:47 AM PST
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(Reuters) – The most significant gainers from last year’s wave of investment in artificial intelligence were U.S. chip stocks; however, they have faced challenges this year as investors shift their attention to software firms in pursuit of the next big opportunity in the AI sector.
Instability caused by tariffs and a bleak demand forecast following the introduction of cost-effective AI models from China’s DeepSeek have redirected focus away from semiconductor stocks.
Many analysts perceive the ascent of software as a long-term evolution as interest moves from AI infrastructure components.
“There has been a noticeable shift partly due to DeepSeek, the semiconductor gains from last year, and restrictions on U.S. chip exports to China,” stated David Russell, global head of market strategy at TradeStation.
“Investors are looking for narratives that will unfold over the next three to five years … particularly those companies that stand to gain from Nvidia’s previous successes.”
This year, the Philadelphia SE Semiconductor index (.SOX) has fallen by 5.6%, while industry leader Nvidia (NVDA.O) has seen a nearly 13% decline.
Conversely, several software firms have experienced gains, including Atlassian (TEAM.O), CrowdStrike Holdings (CRWD.O), Palantir Technologies (PLTR.O), and Cognizant (CTSH.O), which have risen between 7% and 19%.
Exchange-traded funds focusing on software companies have also attracted significant inflows.
According to Morningstar data, the iShares Expanded Tech-Software Sector ETF has drawn in over $1.87 billion so far this year through February 28, contrasting with more than $1 billion in outflows from both the iShares Semiconductor ETF (SOXX.O) and the VanEck Semiconductor ETF (SMH.O).
The inflow into the IGV fund has already surpassed last year’s total net inflows of $446 million, as reported by VettaFi. In 2024, the iShares and VanEck chip ETFs attracted $2.46 billion and $6.55 billion, respectively.
This transition is viewed as a natural progression in AI investing as the primary applications of the technology reside within software, said Adam Turnquist, chief technical strategist at LPL Financial. LPL, an investment advisory firm, prioritizes software over chips.
Morgan Stanley also favors software companies as the adoption of AI technology expands.
“The second stage of the innovation cycle occurs when products are utilized, and that’s when software companies begin to generate revenue … we are beginning to witness the rise of the software aspect of this equation,” commented Keith Weiss, equity analyst at Morgan Stanley.
This transition is happening as investors are starting to question how sustained the growth rate of chips can be in 2024, especially given the underperformance of many software companies.
DeepSeek’s competitively priced chatbot has illustrated that increasing competition could compress profits for direct-to-consumer AI products, and enterprise software companies might find it easier to monetize emerging technologies, noted Brian Mulberry, portfolio manager at Zacks Investment Management, who has reduced his holdings in Nvidia since last June.
Furthermore, semiconductor stocks are facing pressures from a worsening Sino-U.S. trade conflict.
DIVERGENT TRENDS
Analysts consulted by Reuters identified companies such as Palantir (PLTR.O), Microsoft (MSFT.O), Oracle (ORCL.N), and Salesforce (CRM.N) as preferred software investments.
However, the performance of these stocks has shown considerable divergence this year.
Palantir, which offers AI software to businesses, has seen substantial gains.
On the other hand, Microsoft and Salesforce experienced declines of 4.9% and 12.6%, respectively, impacted by a broader downturn in U.S. stocks and the current AI returns not yet having a significant impact on corporate financials.
According to Morgan Stanley’s Weiss, it may take until 2026 for these returns to be reflected in some companies.
Valuations remain high, with Microsoft and Oracle trading at approximately 27 and 23 times forward earnings, respectively, compared to Nvidia’s 24.6, based on LSEG data.
Nonetheless, some investors are prepared for a long-term strategy.
“What we require is not additional Nvidia chips, but applications,” said Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management.
Reporting by Lisa Mattackal and Johann Cherian in Bengaluru; Editing by Arpan Varghese and Shounak Dasgupta
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