The tech industry is experiencing a major shift this year as software stocks take a hit while hardware stocks soar, thanks to the AI boom. For years, software companies have been the darlings of Wall Street, with high profit margins and asset-light business models leading to strong performance. However, the tide has turned in 2021 as hardware companies are reaping the benefits of the growing adoption of generative artificial intelligence.
According to Baird’s Ted Mortonson, software companies are struggling to monetize AI while hardware providers are seeing a surge in demand for AI-enabled GPU chips. This has led to hardware stocks outperforming software stocks by a significant margin this year. Companies like Nvidia, AMD, Super Micro Computer, Broadcom, and Dell are seeing their profits soar as they cater to the increasing need for AI infrastructure.
Mortonson explains that the challenge for software companies lies in the lack of applications that can deliver a significant return on investment for both the companies and their customers. The process of organizing and structuring data in a way that can be understood by AI can take months, and many software companies have yet to even start this process.
Additionally, tight IT budgets are causing major corporations to prioritize spending on hardware over software. This trend is expected to continue for the foreseeable future, with hardware stocks projected to outperform software stocks through 2025.
Overall, the shift in the tech industry highlights the importance of infrastructure in the AI era. As companies continue to invest in AI technologies, hardware providers are poised to benefit the most, while software companies may face challenges in adapting to the new landscape.
