Wall Street is under pressure on software stocks. This expert says this is ‘absolutely wrong’

• Software stocks should rebound as Wall Street realizes they “hold the key” to unlocking the benefits of AI, according to the founder of tech-focused private equity firm Thoma Bravo.

• The software industry has been plagued by concerns about AI’s uncertain commercial potential, as well as fears that the emerging technology will upend established business models.

Concerned software investors worry that artificial intelligence is disrupting the multi-billion dollar industry. One veteran tech investor says these concerns are misplaced.

Orlando Bravo, founder and managing partner of technology-focused private equity firm Thoma Bravo, called the narrative that AI will eat software “absolutely wrong” on Wednesday in an interview with CNBC. The reason: they know what the companies and industries they serve need to be successful – and are still positioned to make it happen.

“The franchise value of most software companies is (their) deep domain knowledge,” Bravo said. That, he said, puts software companies at the intersection of AI capabilities and business needs.

“If you want to see widespread adoption of AI in the enterprise, these are the companies that will do it,” Bravo said. ‘These are the companies that hold the key.

Artificial intelligence hype has been driving stock market returns for more than three years. Investors have recently shunned software stocks in favor of sectors with more concrete evidence that the AI ​​boom is contributing to the top and bottom lines.

The software industry has been dogged lately by concerns that the share of legacy software in enterprise IT budgets will shrink as companies devote more resources to AI-native applications. Investors are also concerned that the industry’s profit margins will shrink as competition increases.

These concerns have created a divide between the tech sector’s best and worst performing stocks. The PHLX Semiconductor Index (SOX) is up about 12% this year – after rising 42% last year – while the iShares Expanded Tech-Software Sector ETF (VAT) is down more than 10%.

Shares of software giants Applovin (APP), intuitive (INTU), and ServiceNow (NOW) are all down about 20% so far this year, making them the S&P 500’s worst performers. Meanwhile, shares of Sandisk, the maker of flash memory devices, haveSNDK) have doubled in the past three weeks.

Analysts expect AI infrastructure spending to continue rising in semiconductor stocks this year. A shortage of memory and data storage hardware could support the momentum of stocks like Sandisk and Micron (IN), according to a recent note from Bank of America. Evidence that tech giants will continue to spend aggressively on data center infrastructure could revive Nvidia’s stock (NVDA) and its AI chip competitors such as Broadcom (AVGO) and advanced micro devices (AMD), the analysts said.

Software may be facing a tougher year, but investors shouldn’t write off the sector entirely, according to Oppenheimer analysts. Investor sentiment toward software stocks could improve this year if AI initiatives across the economy boost the sector’s revenue and backlog growth, or if software companies themselves demonstrate that AI increases efficiency and improves margins, the analysts said.

Bravo said he already sees evidence that AI is doing that. “Many of our companies just ended their year in December,” he said, “and we saw a big increase in quarterly bookings from these companies, partly because of the rise of AI.”

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