Barclays: AI Investment Thesis to Broaden

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New research from Barclays' investment bank division says a shift in the AI investment narrative is underway and should become more prominent in 2025 as investors move away from semiconductors and towards software.

The first half of 2024 saw semiconductors outperform other AI investment areas. However, software closed this performance gap almost entirely in the latter part of the year.

While the sharp rise in software stocks relative to semiconductors may suggest technical factors (e.g., light positioning) are at play, the rally has not been indiscriminate.

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Investors differentiate between potential winners and losers, with a high degree of return dispersion evident in the software sector. This points to the crucial role fundamentals play in the current market.

Barclays analysts believe that this shift towards software signals a change in focus from the AI stack's foundational hardware and infrastructure layers to the application layer.

This is supported by the evolution of AI technology, which is moving from Gen AI-based co-pilots towards Agent AI. Software companies are at the forefront of this development.

Barclays suggests screening for companies with low volatility and strong upside potential to identify promising investment opportunities in the software sector.

Based on this screening approach, Nutanix (NTNX), Zscaler (ZS), and Crowdstrike (CRWD) emerge as the top contenders for long call options.

Another attractive strategy for gaining exposure to software involves worst-of-calls trades on high-conviction names.

Barclays analysts identify Salesforce (CRM), Adobe (ADBE), and Snap (SNAP) as promising baskets for this strategy due to their low correlations and Barclays' Overweight ratings.

A March 2025 105% worst-of call on this basket offers a significant discount compared to average vanilla call options.

Barclays' VolScore analysis, however, shows that volatility on the IGV (Software) ETF is not particularly cheap.

This reinforces the need for a selective approach to investment in the Software sector.