By Software stocks are about to have a breakout moment, 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 software’s “time to shine” as “positive catalysts converge,” 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 explain that widespread AI adoption has happened more rapidly than PC and internet adoption in prior major technology cycles, which could mean that agentic 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 would not disregard the near-term disruption potential of emerging second-generation AI tools that already exhibit PhD-level intelligence on some tasks and could displace workers as early as 2H25,” the analysts wrote.
As a result, qualitative commentary on ramping up enterprise AI adoption during earnings calls will likely evolve into indications of incremental revenue boosts this year, before more meaningful monetization as early as 2026, they add.
Such a trajectory would likely be a welcome development for many AI investors who expressed worries last summer after pouring such huge amounts of money into the tech with little signs of a return on investment.
The analysts also point to continued cloud migration and accelerating IT budgets, which should prove a catalyst for revenue growth into next year, they say.
They add that these three major tailwinds have yet to be reflected in the market, with revenue multiples and growth expectations for software stocks still below 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 name ServiceNow, Datadog, Gitlab, Global-E Online, Five9, Monday.Com and Asana as top picks in the sector, most with similarly double-digit upsides.
