Bank of America says software stocks are poised for a breakout moment. Analysts point to the growing potential of agent AI, continued cloud migration, and normalization of IT spending. They name the top three stocks in the sector, each with more than 20% upside potential.
Software stocks are on the cusp of a breakout, according to Bank of America analysts.
They say the sector is not cheap, having risen 59% in 2023 and 23% last year, but further positive developments for the industry are not yet fully priced in.
Analysts wrote in a note Tuesday that now is software’s “time to shine” as “positive catalysts converge.”
They specifically point to the growing potential for AI monetization through agent AI, which is agent-like technology that can autonomously perform complex tasks on behalf of users.
They argue that widespread adoption of AI is occurring more rapidly than the adoption of PCs and the Internet in previous major technology cycles, meaning agent AI is closer than expected. It explains that it is possible.
They see real-world applications possible as early as the second half of this year, which could see well-positioned software stocks gain market share from the $12 trillion services industry. It may be helpful to do so.
“Ignoring the potential for short-term disruption from emerging second-generation AI tools that are already demonstrating PhD-level intelligence in some tasks and could replace workers as early as the second half of 2025. “We have no intention of doing so,” the analysts wrote.
As a result, qualitative comments about growing enterprise AI adoption in earnings calls could evolve into hints of revenue and profit growth this year, before more meaningful monetization occurs as early as 2026. Expensive, they add.
Such a trajectory would likely be a welcome development for many AI investors, who expressed concerns last summer after pouring huge amounts of money into a technology with little sign of a return on investment.
Analysts also point to continued cloud migration and accelerating IT budgets, which should be catalysts for revenue growth into next year.
These three major tailwinds have not yet been reflected in the market, and software stocks’ earnings multiples and growth expectations remain below their five-year median and pre-pandemic levels, they added.
With this strong backdrop in mind, analysts believe that top companies such as Salesforce, HubSpot, and Microsoft should benefit the most from the potential of agent AI, with an increase of 36% and 21%, respectively, from current levels. , said there was an increase of 23%.
They also cite ServiceNow, Datadog, Gitlab, Global-E Online, Five9, Monday.Com, and Asana as top contenders in the space, with most showing double-digit gains as well.
