The artificial-intelligence driven rally for software growth stocks seems to be running out of steam in the wake of recent earnings reports. While Palantir stock has continued its rally, some software companies viewed as promising AI stocks have issued disappointing 2024 guidance.
Shares in Palantir Technologies have jumped 49% in 2024. Aside from Palantir stock, two large-cap software companies, Microsoft and Salesforce, are still in favor.
Microsoft stock has advanced over 6% in 2024 while Salesforce stock has gained 15%. But Snowflake has retreated 19%. Snowflake stock dived on a weak fiscal 2025 outlook.
Meanwhile, the iShares Expanded Tech-Software ETF — comprised of many of the major enterprise software players — boomed 59% last year amid buzz over generative AI. The IGV index has gained only 4.7% this year vs. the Nasdaq composite index's 7% advance.
Chips Outperform Software As AI Stocks
Semiconductor companies such as Nvidia, Arm Holding and Advanced Micro Devices remain top-performing AI stocks. Meanwhile, the PHLX Semiconductor Sector index is up 18% in 2024.
Nvidia stock has surged 78% in 2024. Arm stock has jumped 75%.
Cloud computing giants are driving revenue growth for chipmakers amid AI-related upgrades in data centers. Software projects take longer to ramp up. Also, the challenge for many software companies is how to price AI tools integrated into their platforms.
"We believe IGV underperformance is a result of overzealous AI expectations which seem to be coming back to reality," Jefferies analyst Brent Thill said in a March 10 report.
He added: "As expected, software companies provided conservative guides during Q4 earnings. Within our coverage 50% of companies issued 2024 revenue guidance below the Street. We believe expectations were higher as investors expected AI revenue to flow through more meaningfully in 2024. We believe the AI revenue wave hits in the second half 2024 and into 2025."
In a report published Monday, Bank of America analyst Alkesh Shah also lowered expectations.
BofA Report: AI Monetizations Lags
"We expect software companies to increase AI investments significantly in the year ahead, although it remains unclear whether the newest wave of AI products will produce the next leg of software revenue growth, enable companies to defend their market shares or a mix of both," Shah said.
He added: "Among our software coverage, almost all of them are developing AI products. However, very few have articulated monetization strategies. Some of our covered companies are likely to produce AI products to defend their market shares, but we expect many more to articulate AI product monetization strategies in 2024 as focus on adoption shifts to monetization."
According to Shah, one problem is that many companies are likely to cut spending for other software if they launch AI-related projects.
Meanwhile, Morgan Stanley hosted a technology conference last week where executives from dozens of software companies appeared.
"We heard excitement across the board from software vendors around the expanding capabilities of generative AI and the emerging market opportunities behind those capabilities," said analyst Keith Weiss in a report published Friday. "However, companies preached patience, noting this is still enterprise software and it will take some time for monetization of gen AI-related products to roll through into their top line."
Adobe Stock: Earnings Due March 14
Buzz around AI stocks has surged since startup OpenAI launched ChatGPT in November 2022. Microsoft is OpenAI's biggest investor.
OpenAI is a leader in generative AI technology, which uses massive data sets and computing power to create generally 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 earnings are due March 14.
Follow Reinhardt Krause on X, formerly Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
