(Bloomberg) -- DeepSeek’s claim that it has found a lower cost way to create AI models has made software stocks a hot trade.
The sudden emergence of DeepSeek’s model at first sent stocks with deep ties to the AI revolution into a nose dive on concerns that efficiency improvements could lead to reduced hardware spending. Semiconductor and other AI infrastructure-related stocks tumbled on Monday. The Nasdaq 100 sank 3% and Nvidia Corp.’s 17% plunge erased $589 billion from its value — the largest such drop ever for a single stock. The S&P 500 semiconductors & semiconductor equipment sector fell 14% Monday.
But the selloff turned into a buying opportunity across software stocks. Software shares in the S&P 500 Index, which include bellwethers like Microsoft Corp., Salesforce Inc. and Oracle Corp., are beating their semiconductor counterparts in the benchmark equities gauge by 11 percentage points over the past three sessions, according to data compiled by Bloomberg. If that holds through Friday, it would be the widest weekly gap since June 2002.
The trading desk at Goldman Sachs Group Inc. says companies such as Microsoft, ServiceNow Inc. and Salesforce could benefit from more efficient AI computing and that a wider mix of software companies could emerge because of the innovation. The derivatives team at Barclays PLC said it sees gains coming from cheap call options on software product developers. Citigroup Inc. on Wednesday reiterated its bullish call on software shares.
“Cheaper AI models should speed up and pull forward development of new products, services, and the expected gains in productivity, even if it comes at the expense of equipment providers in the short term,” JPMorgan Chase & Co. strategists including Dubravko Lakos-Bujas wrote in a note Tuesday.
Software stocks have been underperforming semiconductor shares since 2021 and the gap has only widened in the past two years as customers were increasing spending on chips and hardware versus services provided by software companies.
“We believe software stocks which can monetize AI and possibly leverage inexpensive large language models models will likely see a bid in the near-term,” Citigroup’s Stuart Kaiser wrote. His team upgraded Citi’s AI Software basket and reiterated its bullish view on the sector.
Barclays global equity derivatives strategy team led by Stefano Pascale recommends clients buy cheap and liquid options on stocks like Adobe Inc., Nutanix Inc., Intuit Inc. and others, saying that if the recent selloff proves overdone, buying cheap upside on software names would be smart.
This week’s move into software stocks comes at a crucial time as traders digest big tech earnings results. The earnings at software companies are forecast to grow 7.2% in the fourth quarter, according to Bloomberg Intelligence. That’s a sharp contrast with 36.6% growth that forecast for semiconductor and is below earnings expectations for the S&P 500 Index.
--With assistance from Jeran Wittenstein and Jessica Menton.
