Software's Unlikely Savior How It Will Conquer AI

• Software companies are poised to benefit significantly from AI development, contrary to fears of obsolescence.
• Major AI platforms lack the expertise to develop enterprise-class software, giving established vendors an advantage.
• Using AI to develop in-house software systems is impractical and economically unsound for most companies.
• HSBC recommends building positions in the software space due to historical lows in valuations and strong demand momentum.

A Curious Case of Software Survival

Ah, yes, the relentless march of technology. It reminds me of the wildebeest migration, only with algorithms and venture capital. Recent market jitters had some fearing a 'SaaSpocalypse,' suggesting software would be devoured by the AI beast. But as I've often observed in nature, appearances can be deceiving. The humble lichen, for instance, thrives where others falter. Similarly, reports indicate that software is not destined for extinction; instead, it may well become the apex predator of the AI food chain.

The Enterprise Software Ecosystem

Consider the vast, intricate ecosystems of the Serengeti. Each creature has its niche, its role to play. The same is true in the world of enterprise software. These consumer AI platforms, like the fledgling birds just out of the nest, lack the experience to build robust enterprise solutions. They would be, as HSBC aptly puts it, "architecting from scratch in unfamiliar, highly complex areas." Building robust enterprise solutions is not a trivial task. It's akin to building a beaver dam, requiring skill, patience, and a deep understanding of the environment. And let's not forget the financial impracticality of companies developing their own software with AI. As I often say, "An understanding of the natural world and what's in it is a source of not only a great curiosity but great fulfillment". Similarly, understanding the software landscape reveals why relying solely on AI for development is, well, a bit like herding cats. It will also be interesting to watch Asian Markets Soar Amid Tech Optimism and Geopolitical Shadows.

The Software Vendors Strike Back

Imagine the rainforest, teeming with life, each species vying for dominance. Yet, it is not the loudest or the most aggressive that always prevails, but rather the most adaptable. Existing software vendors, with their deep roots and extensive infrastructure, are perfectly positioned to integrate AI into their platforms. They're not starting from scratch; they're evolving, adapting, becoming something new and more powerful. It's akin to the remora fish hitching a ride on a shark. The software vendors leverage AI for their benefit, enhancing their capabilities and securing their position in the ecosystem. As I've said before, "People must feel that the natural world is important and valuable and beautiful and wonderful and an amazement and a pleasure that they actually want to do something to protect it."

Navigating the Investment Terrain

The financial markets can often resemble a turbulent ocean, with waves of panic and periods of calm. HSBC suggests that the current undervaluation of software stocks presents a unique opportunity. It's like discovering a rare orchid in a neglected corner of the jungle. The sector valuations are at historical lows, even though, as HSBC notes, the sector is poised to expand massively. This could be the moment to build or expand positions within the software space, a move that may prove quite timely.

The Lion's Share of the Value

Consider the savanna, where the lion reigns supreme. While other creatures may benefit from the lion's presence, it is the lion that ultimately reaps the greatest reward. Similarly, while AI may bring profitability to the hardware and semiconductor sectors, it is the software sector that is predicted to generate the lion's share of the value. They have been planning and building agentic AI for the past two years, with a kick-off expected in 2026. This long-term vision positions them to capitalize on the full potential of AI, much like the patient hunter waiting for the opportune moment to strike.

HSBC's Bold Predictions

HSBC's analysis offers a glimmer of hope in these uncertain times. They have a "Buy" rating on a range of software stocks, including Oracle, ServiceNow, Salesforce, HP, and CrowdStrike. Their cautious stance on companies like Twilio, SAP, Fortinet, and Cisco, with a "Hold" rating, reflects a nuanced understanding of the market. Finally, their "Reduce" rating on Palo Alto Networks, IBM, and CoreWeave suggests a more critical outlook on their potential. As I've often said, "Cherish the natural world because you're a part of it and you depend on it." Similarly, cherish the software sector, for it seems it will play a vital role in shaping the future of AI.