AI investment focus shifts from chips to software in 2025
AI growth is expected to benefit software firms more than chip manufacturers in the coming years.
Investors are moving away from semiconductor stocks and turning their focus to software companies as the AI investment landscape evolves.
A surge in AI chip demand drove record growth for semiconductor firms in 2024, but new competition and trade restrictions have dampened enthusiasm. The emergence of China‘s DeepSeek, offering lower-cost AI models, has further pressured chip stocks, leading investors to seek new opportunities in software.
The Philadelphia Semiconductor Index has fallen 5.6% this year, with Nvidia dropping nearly 13%, while software firms such as Atlassian, CrowdStrike, and Palantir have gained between 7% and 19%.
Investment flows reflect the shift, with software-focused exchange-traded funds seeing significant inflows, while semiconductor ETFs have recorded large outflows. Analysts see the trend as a natural progression, with AI technology increasingly monetised through software applications rather than hardware.
Morgan Stanley and other investment firms now favour software firms such as Palantir, Microsoft, and Oracle. While some software companies have yet to see AI-related revenue growth reflected in their financials, analysts predict gains by 2026.
High valuations remain a concern, but investors are betting on the long-term need for AI applications rather than additional hardware.
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