Investors have been happy to buy semiconductor stocks off the back of artificial intelligence's (AI) emergence, but they have been less successful at picking software winners.
There is an acceptance that the semiconductor industry will receive a boost from the emergence of ChatGPT and other generative AI systems. Most obviously this has manifested in the share price rise of graphics processing units (GPU) designers, such as Nvidia (US:NVDA) and AMD (US:AMD), as well as their manufacturer TSMC (TW:2330). In the year to date alone, indices tracked by semiconductor exchange traded funds (ETFs) have risen more than 20 per cent.
However, software benchmarks have risen by just 5 per cent over the same period. This seems a little counter-intuitive. The companies acquiring the GPUs are the cloud computer providers such as Amazon (US:AMZN), Microsoft (US:MSFT), Alphabet (US:GOOG) and Oracle (US:ORCL). However, they are only spending these billions on chips in the expectation that software companies will utilise them. For the semiconductor companies to justify their now-stretched valuations, the software companies will at some point have to start accelerating their earnings growth.