Hard to Soft: Investors shift from chip stocks to apps, platforms as AI investment landscape evolves

Investors are shifting focus from semiconductor stocks to software companies in the AI investment landscape, marking a natural evolution in how capital flows through the artificial intelligence sector. This rotation reflects both market dynamics and the maturing AI ecosystem, as attention moves from the hardware infrastructure that powers AI to the applications and platforms that will deliver its practical value.

The big picture: U.S. chip stocks that dominated last year’s AI investment boom have faltered in 2025, while software companies are gaining momentum as investors seek new opportunities in the AI value chain.

• The Philadelphia SE Semiconductor index has dropped 5.6% this year, with industry leader Nvidia plunging nearly 13%.
• Meanwhile, software companies like Atlassian, CrowdStrike, Palantir Technologies, and Cognizant have rallied between 7% and 19%.

Why this matters: The shift represents a significant evolution in how investors view AI’s value creation pathway, moving from the components that build AI infrastructure to the software solutions that leverage it.

• This transition aligns with the typical progression of technology innovation cycles, where hardware deployment eventually gives way to software applications that monetize the underlying infrastructure.
• As Keith Weiss of Morgan Stanley explains: “The second stage of the innovation cycle is when people start utilizing products and that’s when the software companies start getting paid… we’re now starting to see the ascendancy of the software part of the equation.”

Behind the numbers: Exchange-traded funds tell a similar story, with software-focused ETFs attracting capital while semiconductor funds experience outflows.

• The iShares Expanded Tech-Software Sector ETF has pulled in over $1.87 billion through February 28.
• In contrast, the iShares Semiconductor ETF and VanEck Semiconductor ETF each saw more than $1 billion in outflows during the same period.

Key factors driving the shift: Several market developments have contributed to investors’ changing focus.

• The emergence of lower-cost AI models from China’s DeepSeek has raised questions about whether investment in the most advanced and costly Nvidia chips is as necessary as once thought.
• Ongoing restrictions on U.S. chip exports to China have added uncertainty to semiconductor companies’ growth prospects.
• Tariff-driven volatility has further complicated the outlook for chip manufacturers.

What they’re saying: Analysts view this rotation as both practical and strategic for forward-looking investors.

• “Investors are looking for the next three-to-five-year stories… those companies that are going to benefit from what Nvidia has already done,” said David Russell, global head of market strategy at TradeStation.
• Adam Turnquist, chief technical strategist at LPL Financial, described the shift as a “natural progression for AI investing” since the primary use cases for AI technology are in software applications.