For over a year, the prevailing strategy in the tech sector has been to favor semiconductor stocks while shorting software stocks, driven by fears that AI would undermine software companies. However, recent trends show software stocks, particularly through the IGV ETF, are beginning to outperform semiconductors, as evidenced by a significant upward movement in their relative strength.
This shift may indicate a broader market reversal, as software stocks are also gaining ground against the S&P 500. Jefferies' research report highlights that many fears surrounding software have already been priced in, suggesting that while weak software may struggle, strong incumbents will benefit from AI integration.
Two stocks identified as potential plays in this evolving landscape are ServiceNow and Snowflake. ServiceNow, which has seen a 50% decline from its peak, is showing signs of recovery and has received bullish upgrades from analysts, with a target price of $141.12.
Snowflake, on the other hand, is positioned to benefit directly from AI workloads, demonstrating strong growth metrics and a partnership with OpenAI. Both stocks represent contrasting strategies within the software recovery narrative, with ServiceNow appealing to value investors and Snowflake catering to growth-oriented investors