The artificial intelligence (AI) investment landscape is undergoing a transformation. While U.S. chip stocks dominated last year’s AI boom, investors are now shifting their focus toward software companies. With increasing competition and changing market dynamics, software is emerging as the next major AI investment opportunity.
Why the Shift from Chip Stocks?
In 2024, semiconductor companies like Nvidia saw massive growth, but in 2025, challenges such as tariff-driven volatility, declining demand, and the rise of cost-efficient AI models from China’s DeepSeek are making chip stocks less attractive.
David Russell, global head of market strategy at TradeStation, notes, “Investors are looking for the next three-to-five-year stories … those companies that are going to benefit from what Nvidia has already done.”
The Philadelphia Semiconductor Index (SOX) has dropped by 5.6% this year, while Nvidia has declined by nearly 13%. On the other hand, software companies such as Atlassian, CrowdStrike, Palantir, and Cognizant have gained between 7% and 19%, drawing investor attention.
Software ETFs Gaining Traction
Investment funds are also reflecting this shift. The iShares Expanded Tech-Software Sector ETF has seen inflows exceeding $1.87 billion in 2025, surpassing last year’s total net inflows of $446 million. In contrast, semiconductor ETFs, such as the iShares Semiconductor ETF and the VanEck Semiconductor ETF, have experienced over $1 billion in outflows each.
The Long-Term Case for AI Software
AI software is seen as the next logical phase of AI adoption. Adam Turnquist, chief technical strategist at LPL Financial, explains, “The second stage of the innovation cycle is when people start utilizing products, and that’s when software companies start getting paid.”
Morgan Stanley analyst Keith Weiss echoes this sentiment, stating that the financial impact of AI software will likely become evident by 2026. Companies such as Palantir, Microsoft, Oracle, and Salesforce are well-positioned to benefit from this shift.
Challenges and Valuation Concerns
Despite the optimism, AI software stocks face challenges. Microsoft and Salesforce have seen stock declines of 4.9% and 12.6%, respectively, due to broader market selloffs and delayed financial returns from AI.
Moreover, valuations remain high. Microsoft and Oracle trade at 27 and 23 times their forward earnings, respectively, compared to Nvidia’s 24.6 times.
The Future of AI Investments
While semiconductor stocks remain crucial, investors recognize the growing need for AI applications rather than just hardware. Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management, puts it simply: “We don’t need more Nvidia chips; we need applications.”
As AI adoption matures, software companies are likely to emerge as the biggest winners in the AI revolution. Investors looking for long-term growth should pay close attention to AI-driven software solutions.
