Software stocks are on the verge of a turning point, according to Bank of America analysts.
They say that while the sector is by no means cheap after rallying 59% in 2023 and 23% last year, further positive developments for the industry aren’t fully priced in yet.
It’s “a bright moment” because “positive catalysts are converging,” the analysts wrote in a Tuesday note.
They point in particular to a rising potential for AI monetization via agentic AI, an agent-like technology that can autonomously accomplish complex tasks on the user’s behalf.
They say that the widespread adoption of AI has happened faster than PC and internet adoption during previous primary generation cycles, which may mean that agent AI is closer than expected.
They see potential for real-world applications as early as the second half of this year, which could help well-positioned software stocks capture market share from the $12 trillion services industry, they say.
“We do not expect a near-term disruption to emerging second-generation AI teams that already demonstrate PhD-level intelligence in certain responsibilities and could displace employees as early as 2H25,” the analysts wrote.
As a result, qualitative observation on growing adoption of AI by companies during earnings calls will likely shift towards indications of further earnings expansion this year, ahead of more significant monetization as early as 2026, they add.
Such a trajectory would likely be a welcome progression for many AI investors who voiced concerns last summer after making a huge sums of cash investment in generation with little sign of a return on their investment.
Analysts also point to the continued migration to the cloud and acceleration of IT budgets, which will prove a catalyst for earnings expansion next year, they say.
They add that those three main tailwinds have not yet been reflected in the market, and that earnings multiples and expansion expectations for software stocks remain below the five-year median and pre-pandemic levels.
With such a strong backdrop in mind, the analysts say top picks like Salesforce, HubSpot and Microsoft should benefit most from the potential for agentic AI, with 36%, 21% and 23% upsides from current levels, respectively.
They also cite ServiceNow, Datadog, Gitlab, Global-E Online, Five9, Monday. Com and Asana as top picks in the industry, with double-digit profits.