Large cap software growth stocks such as Salesforce are outperforming as investors rethink the sector's upside from generative artificial intelligence, says a Bank of America analyst. Salesforce stock and software makers such as Palantir Technologies are off 52-week highs heading into earnings reports that start in late April.
The iShares Expanded Tech-Software ETF — comprised of many of the major enterprise software players — has gained only 6% in 2024 after soaring 59% last year.
"Despite 4Q beats, the software sector saw sell pressure as heightened AI-driven expectations were tempered, but multiples remain largely below pre-Covid levels, indicating that AI-driven upside could be ahead," Bank of America analyst Alkesh Shah said in a report.
The strength of the U.S. economy, inflation, interest rates and corporate spending remain key issues for software growth stocks. In addition, one big debate remains: How soon will companies monetize "generative" artificial intelligence?
Top AI Software Stocks
Shah is among analysts who expect revenue upside from generative AI to kick in for many software stocks in late 2024 or 2025.
"We expect the newest AI wave, generative AI, to drive the next leg of software investment, revenue growth and margin expansion," said the BofA analyst. "Investors frequently overestimate the magnitude of tech disruption in the near-term and underestimate it over the longer-term."
Microsoft stands out as already getting a AI-related revenue boost, he noted. Shah also favors Salesforce stock, MongoDB, ServiceNow, GitLabs and HubSpot.
Google-parent Alphabet could be eyeing a purchase of HubSpot, according to a recent report. But most Wall Street analysts doubt a deal will happen.
Meanwhile, Salesforce stock has gained 13% in 2024 after jumping nearly 98% in 2023. Palantir stock has advanced 30% this year after soaring 167% in 2023.
Artificial Intelligence Buzz
Salesforce stock and Palantir stock are trading near their 50-day moving averages, a key support level.
HubSpot and Microsoft stock belong to the IBD 50 roster of growth stocks.
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 even programming code.
Industry-specific versions of generative AI are expected to use company data to train AI models. The challenge for many software companies is how to price AI tools integrated into their platforms.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
