AI Stocks: Chipmakers to Outperform Software Companies in 2024

Wall Street analysts are downplaying expectations that the AI-driven rally for software growth stocks will continue in the wake of recent earnings reports. While Adobe ( ADBE ) has yet to report, several software companies seen as promising AI stocks have issued disappointing guidance.




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Two big-cap software companies, Microsoft (MSFT) and Sales force (CRM), are still in favor. Microsoft stock has advanced more than 6% in 2024, while Salesforce stock is up 15%. But Snowflake (SNOW) has retreated 19%. Snowflake stocks dive on weak outlook for fiscal 2025

Meanwhile, the iShares Expanded Tech-Software ETF ( IGV ) — which includes many of the big enterprise software players — has surged 59 percent in the past year amid uproar over generative AI. The IGV Index is up 4.7% this year versus the Nasdaq Composite Index’s 7% advance.

Chips optimize software as AI stocks.

Semiconductor companies like Nvidia (NVDA), arm hold (ARM) and Advanced Micro Devices (AMD) was the top performing AI stock. Meanwhile, the PHLX Semiconductor Sector Index is up 18% in 2024.

Nvidia stock is up 78% in 2024. Arm stock has increased by 75%. However, Nvidia stock fell into a bearish reversal after hitting a new high on Friday.

Still, cloud computing companies are driving revenue for chipmakers amid AI-related upgrades in data centers. Software projects take a long time to ramp up. The challenge for many software companies is how to value the AI ​​tools integrated into their platforms.

“We believe that IGV’s underperformance is a result of overzealous expectations of AI feeding back into reality,” Jefferies analyst Brent Thill said in a March 10 report.

He added: “As expected, software companies provided conservative guidance during Q4 earnings. 50% of companies within our coverage issued 2024 earnings guidance down the street. We believe that expectations were higher because investors expected AI revenues to move more meaningfully in 2024. Believe the AI ​​revenue wave will come in the second half of 2024 and into 2025.”

In a report published on Monday, Bank of America analyst Alkeesh Shah also lowered expectations.

BofA Report: AI Monetization Lags

“We expect software companies to significantly increase AI investment over the next year, although it’s not yet clear whether the latest wave of AI products will generate the next phase of software revenue growth,” companies said. will enable it to defend its market share or a combination of both.” Shah said.

He added: “In our software coverage, almost all of them are developing AI products. However, very few have defined monetization strategies. Some of our covered companies are defending their market shares. likely to develop AI products for, but we expect to develop many more products. Clarify AI product monetization strategies in 2024 as the focus on adoption shifts to monetization.”

According to Shah, one problem is that if many companies take on AI-related projects, they can cut costs for other software.

Meanwhile, Morgan Stanley hosted a technology conference last week where executives from dozens of software companies appeared.

“We heard excitement from software vendors across the board about the growing capabilities of creative AI and the emerging market opportunities behind those capabilities,” analyst Keith Weiss said in a report published Friday. ” “However, the companies urged patience, noting that this is still enterprise software and it will take some time for general AI-related products to join their top line.”

Adobe stock: Earnings due March 14.

Buzz around AI stocks has grown since the launch of open AI startup ChatGPT in November 2022. Microsoft is OpenAI’s largest investor.

OpenAI is a leader in generative AI technology, which uses large-scale datasets and computing power to generate typically high-quality content, including text, images, video and programming code.

Industry-specific versions of generative AI are expected to use company data to train AI models.

Adobe’s earnings are scheduled for March 14.

Follow Reinhardt Krause on X, first Twitter @reinhardtk_tech For updates on artificial intelligence, cybersecurity and cloud computing.

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