Software stocks have faced significant challenges as the year progresses, primarily due to investor concerns regarding the potential impact of artificial intelligence (AI) on the future of software companies. This anxiety has its roots in predictions made for 2025, where rapid advancements in AI could disrupt traditional software businesses.
During a recent interview with Yahoo Finance, Snowflake CEO Sridhar Ramaswamy emphasized the need for investors to differentiate between software companies and data-focused enterprises. He pointed out that data platforms hold a unique position and are poised to become increasingly vital in the tech ecosystem. “I think the data layer will continue to rise in importance,” Ramaswamy asserted.
Analysts have noted that fears surrounding AI have particularly weighed on software firms. According to Lori Calvasina, a strategist at RBC Capital Markets, the relative strength of the top ten stocks in the S&P 500 has shown “major deterioration” compared to the broader market. Evercore ISI data reveals that the information technology sector is now trading at its lowest valuation premium relative to the S&P 500 since the pandemic, highlighting a shift in investor sentiment. The price-to-earnings ratio for the “Magnificent Seven” tech stocks has stabilized to align with their post-pandemic norms, while the remaining stocks in the S&P 500 are trading at near-record high valuations.
Despite these concerns, Ramaswamy believes that substantial value remains in established software providers. He suggested that fears regarding AI’s impact might be overstated. “We feel very good about where we are because the data platform is key to helping enterprises unlock value,” he stated, pointing to collaborations with AI leaders like OpenAI and Anthropic as crucial to this strategy.
Interestingly, financial performance and earnings reports of software companies have not validated these AI-related fears. Many firms have reported robust earnings, and their outlooks remain optimistic. Moreover, the pace of innovation to leverage AI opportunities is unprecedented among software companies.
In a demonstration of its commitment to AI advancements, Snowflake recently announced a partnership with OpenAI, involving a significant $200 million deal to integrate advanced AI models into its platform. Last December, a similar collaboration with Anthropic was also announced, valued at $200 million. Additionally, Snowflake introduced a new product, Cortex Code, which is designed as an AI coding agent.
Snowflake’s growth trajectory appears promising; the company reported a third-quarter product revenue increase of 29% year-over-year and boasts a client retention rate of 125%. However, despite these positive indicators, Snowflake’s stock has declined by 12% year-to-date.
Goldman Sachs analyst Gabriela Borges remains bullish on Snowflake, asserting that the company will capture a significant share of the cloud data platform market and related analytics projects. Borges holds a Buy rating on Snowflake, with a target price of $286, suggesting a potential upside of approximately 49% from current levels. On average, Wall Street analysts have set a target price of $281 for the company, reflecting a consensus of confidence in its future prospects.
