After a post-pandemic slump, the software sector is rebounding, with the rise of AI agents poised to drive adoption of generative AI and accelerate revenue growth.
The unprecedented rise of three-trillion-dollar market cap companies such as Nvidia, Apple, and Microsoft highlights Big Tech’s dominance. The technology sector’s superior earnings growth is expected to persist in 2025, fuelled by the adoption of AI, which could prove to be the most disruptive technology over the next decade. While semiconductor companies have been the primary beneficiaries of AI advances, other sectors beyond technology stand to gain as well. Following a long period of underperformance after the pandemic, the software sector has started outperforming since last summer. The gradual roll-out of AI agents is likely to bring steady, positive growth to the sector.
A new type of computing architecture
The rise of generative AI has significantly boosted the semiconductor industry. Whereas traditional CPUs (central processing units), primarily produced by Intel, once dominated the market, GPUs (graphics processing units) have now become essential for running large AI models that demand extensive computing power. Nvidia, holding over 90% of the GPU market, has been the primary beneficiary of this shift in server technology architecture. Its data centre revenue is forecast to surge from just over USD 10 billion in 2022 to more than USD 110 billion by 2024. Demand for Nvidia’s new Blackwell chip was characterised as “staggering” by management during its most recent earnings call. While Nvidia is expected to maintain its lead in the GPU space, increasing competition should come from companies like AMD, Broadcom, and Marvell Technology.
Big Tech’s getting bigger
Historically, new waves of technology like the internet and cloud computing have led to the rise of new market players and the disruption of incumbents. With generative AI, the most successful newcomer has been OpenAI, a leading provider of large language models. OpenAI’s ChatGPT achieved a record-breaking 100 million users within just two months and now serves over 250 million users who interact with it conversationally. OpenAI aims to expand its revenue from an estimated USD 3.7 billion in 2024 to USD 100 billion by 2029, potentially making it the quickest tech company to reach USD 100 billion in sales. Unlike previous tech waves, AI has bolstered Big Tech rather than disrupted it. Cloud computing providers have seen accelerated sales growth over the past four quarters. This is due to the substantial upfront costs of building AI servers, often equipped with Nvidia GPUs, which most companies cannot afford. Instead, they choose to rent computing capacity from Amazon Web Services, Microsoft, and Google. The election of Trump is also seen as a positive for Big Tech as it may lead to less regulation and more M&A, as summed up by Elon Musk in a tweet:
‘America is a nation of builders, soon you will be free to build.’
The introduction of AI agents
Software has long been considered a highly attractive investment market due to its secular growth, high margins, low capital expenditure, and resilience to economic cycles. However, since the pandemic, it has underperformed as growth has slowed. The integration of generative AI features into software applications has progressed slowly, hindered by concerns about reliability, data privacy and cybersecurity. AI assistants, like Microsoft Copilot, have had a mixed uptake, as users must know the correct prompts to initiate actions. The recent development of AI agents – autonomous systems capable of performing tasks without human intervention – may boost the adoption of generative features in software. The number of use cases for software automation should rise with the arrival of AI models with enhanced reasoning abilities, such as OpenAI’s GPT-4o model. Recent results from software companies, like Snowflake and Datadog, with a more cyclical consumption-based business model, have surprised positively and shown sales growth stabilising. The contribution of AI-native customers to Datadog’s annualised subscription revenues increased to 6% in Q3 2024 compared with 4% in Q2. Companies with industry-specific proprietary data and strong competitive positions in generative AI, could see accelerated revenue growth next year.
