Stocks of semiconductors, get over here. Smaller software companies are joining the fray after a frenzied run for large software stocks, and there may be more opportunity for gains in the entire industry.
Software companies are appearing to be a more steady investment for many, whereas chip stocks have been zigzagging so far this year due to post-DeepSeek concerns about an overbuild of artificial intelligence infrastructure and tariffs. The DeekSeek advancements could be advantageous to these businesses and their clients, particularly if computer costs continue to drop.
In 2025, software equities are doing marginally better than semiconductor companies thus far, but the difference is much more pronounced after six months. The S&P North American Expanded Technology Software Index is tracked by the iShares Expanded Tech-Software Sector ETF IGV, which has increased by almost 27% throughout that time. Chips are trailing behind, as evidenced by the iShares Semiconductor ETF SOXX, which tracks the ICE Semiconductor Index, which has grown by less than 1% over the past six months.
It is evident that more software equities are being added to portfolios, or even that chips are being replaced with software. The founder and managing partner of the financial advising company Catalyst Private Wealth, Brendan Connaughton, stated, “It is a conversation being had at the institutional level.” “Software has a level of consistency” because of its “more reliable, consistent revenue growth,” he said. “With chips, DeepSeek threw a curve ball into it.”
Because license revenue is consistent, growth may be slower but less erratic. Additionally, software firms are experimenting with new income streams that would enable them to bill clients only when their new AI features are really used.
Additionally, software is not a tangible commodity that must be produced and sent from nations outside of the United States, therefore it is typically exempt from tariffs because it is distributed via the cloud and runs on local computers, corporate data centers, or the cloud itself.
According to FactSet’s statistics for S&P 500 SPX businesses, software sales growth in the fourth quarter of corporate earnings season is 12.15% so far. According to organizations that have reported so far, hardware income from semiconductors and equipment increased by 11.34% in the fourth quarter.
This month’s report from Nvidia Corp. (NVDA), whose revenue is expected to climb 72% in its fiscal first quarter, will undoubtedly skew that average. Software components of the S&P 500 are predicted to expand at a blended growth rate of 11.7%, while semiconductor components are predicted to increase at a blended rate of 24.6% when combining published results with predictions for businesses that haven’t yet released figures.
Nevertheless, many of the software firms that have recently gained a lot of attention are smaller, expanding more quickly, and are not included in the S&P 500. For instance, Monday.com Ltd. (MNDY), a provider of project management software, reported revenue growth of 32% in the most recent quarter, above forecasts. In the session that followed its earnings, the company’s stock increased by 27%. Confluent Inc. (CFLT), a data-streaming platform, also exceeded forecasts with a 23% increase in revenue, and its stock increased by 25% in the first session after the results.
Jordan Klein, a managing director and TMT-sector specialist at Mizuho Securities, stated in his sales newsletter to clients that “software remains the most favored sector on the buy side in terms of looking for new long ideas that look and feel derisked.”
He pointed out that investors have been clamoring for small-cap and mid-cap software investments, but larger software stocks aren’t exactly “working” for them at the moment. “If you do not own enough of these names, you are probably not going to be outperforming broader tech and/or your key benchmark,” Klein stated.
One major question is whether software will continue to enjoy its renowned reputation at this time. Software hasn’t yet seen the same kind of AI moment as physical hardware since most investors are still primarily concerned with AI’s effects on corporate spending and its potential to increase corporate efficiency. Additionally, chip players may see additional revenue increases as a result of the enormous capital-spending plans that big cloud and hyperscaler businesses have so far disclosed.
“I don’t want to throw the chips in the trash can just because they had a little pothole,” Connaughton said. “I believe that both of those will get married. It all boils down to names and businesses that can succeed in high-growth sectors. The market for corporate software is enormous.
However, software-application developers may profit if investors take anything away from DeepSeek’s lower-cost disclosure, according to Patrick Walravens, head of technology equity analysis at Citizens JMP.
According to Walravens, who covers 37 software businesses, “the apps providers are doing better than the infrastructure providers,” MarketWatch said. The DeepSeek news’s larger meaning is that the reduced computing costs will be advantageous. He remarked, “If you are doing inference and using these [large-language models] to come up with answers and drive your products, your prices are going to go down,” alluding to the costs that businesses incur when they utilize software that draws from these models.
When taught AI models actually make a forecast, make a claim, or draw their own conclusions, this is referred to as inference. According to Shyam Sankar, Chief Technology Officer at Palantir Technologies Inc. (PLTR), who cited DeepSeek, “the price of inference is dropping like a rock.”
More software purchases may be necessary for the next wave of AI, including those for corporate and cloud data centers as well as AI-specific data centers that are now under construction, particularly for the application layers.
“Our checks indicate improving demand-pattern inputs across software, including data/analytics and SaaS, and with cybersecurity remaining strong,” Gregg Moskovitz, an analyst at Mizuho Securities, wrote in a note to clients. The adoption of AI, including the usage of agents, is increasing, he continued. “We heard several reports of even more activity around customers readying their data estates for the AI wave,” Moskovitz stated.
Additionally, several software companies are attempting to become leaner, a quality that Wall Street consistently supports. Okta Inc. (OKTA), Workday Inc. (WDAY), and Salesforce Inc. (CRM) all experienced some stock momentum in the last two weeks following the announcement of layoff rounds; however, Salesforce has since lost much of that boost following last week’s announcement that Chief Operating Officer Brian Millham will retire in May. Robin Washington, a board member of Salesforce, will take his place as president and chief operational and financial officer.
This year has already seen significant increases in the share prices of a few midtier software businesses, such as Snowflake Inc. (SNOW) and Confluent, with Snowflake up 21% and Confluent up 25%. However, after declining earlier this year, several larger-cap equities, including as Oracle Corp. (ORCL) and ServiceNow Inc. (NOW), may experience a resurgence.
As additional evidence shows that AI may truly result in cost reductions or other financial advantages, there may be more upside. Because many software businesses charge by the seat, some investors might be worried that if customers need fewer workers as AI tools become more useful, they might want fewer software licenses.
“On one hand, you might worry the software companies can only charge half because their customers are using half the seats,” Walravens stated. However, he pointed out that businesses are now include consumption pricing in their contracts. “We will charge you a dollar every time you use AI to deflect a [call-center] conversation,” he stated as an example.
As AI use grows, that might turn into a profitable model.
