Bank of America analysts are predicting a significant upturn for software stocks, stating that the sector is poised for a breakout moment. Despite substantial gains of 59% in 2023 and 23% last year, the analysts believe that there are still untapped positive developments ahead for the industry. In a recent note, they declared that software stocks are on the cusp of their “time to shine” as various favorable factors align for potential growth.
Key drivers identified by the analysts include the increasing potential for agentic AI, the ongoing trend of cloud migration, and the normalization of IT spending. Agentic AI, described as an agent-like technology capable of autonomously handling complex tasks on behalf of users, is highlighted as a particularly promising avenue for AI monetization. The analysts note that the adoption of AI is progressing more rapidly than previous major technology cycles, potentially indicating a faster-than-expected emergence of agentic AI. They anticipate real-world applications materializing as soon as the latter half of this year, potentially enabling well-positioned software companies to gain market share in the $12 trillion services industry.
Moreover, the analysts caution about the disruptive potential of second-generation AI tools with advanced capabilities, potentially displacing workers as early as the second half of 2025. They anticipate that discussions around increasing enterprise AI adoption during earnings calls will transition towards indications of revenue enhancements in the near term, with more substantial monetization prospects as early as 2026.
Cloud migration and the acceleration of IT budgets are also identified as significant tailwinds that are expected to drive revenue growth in the sector. The analysts note that despite these favorable factors, the market has yet to fully reflect the potential upsides, with revenue multiples and growth expectations for software stocks still lagging below historical benchmarks.
In light of these factors, the analysts have identified top picks in the sector that are likely to benefit the most from the anticipated growth opportunities. Salesforce, HubSpot, and Microsoft are singled out as particularly promising choices, with projected upsides of 36%, 21%, and 23% respectively from current levels. Additionally, ServiceNow, Datadog, Gitlab, Global-E Online, Five9, Monday.Com, and Asana are also highlighted as top selections in the sector, with many offering double-digit upsides.
The analysts’ optimistic outlook is underpinned by the convergence of positive catalysts within the software industry, suggesting a wave of growth and innovation on the horizon. As investors navigate the evolving landscape of AI technology, cloud migration, and IT spending trends, the identified top stocks stand out as potential beneficiaries poised to capitalize on the sector’s anticipated momentum.
In conclusion, Bank of America’s bullish stance on software stocks reflects a strategic alignment with emerging industry trends and technologies, signaling a potentially lucrative period ahead for investors eyeing opportunities in the dynamic software sector.
