AI will give software developers a "second birth," Goldman expects. Which stocks does he advise?

SaaS companies like Salesforce, Adobe and ServiceNow, which sell software on a subscription basis, will not lose from the introduction of AI, but on the contrary, they will become better, according to a Goldman Sachs analyst. His statement goes against the state of the industry, as many of its market favorites are not experiencing a bubble like AI technology right now, but rather a depression. However, Goldman is confident that AI is not killing software, but giving it a "second birth."

Artificial intelligence will work alongside software and become a scaling factor for it, according to Goldman Sachs analyst Kash Rangan. He said this in an interview with Yahoo Finance at the annual Communacopia + Technology conference.

The analyst compared the current moment in AI development to the emergence of the web browser in the 1990s, which many at the time saw as a threat to traditional software that worked primarily through command-line commands. However, the browser merely became a new user interface that expanded the industry. In the same way, Rangan believes that the use of software through the adoption of AI will become even more streamlined and efficient.

That, he believes, makes SaaS (Software as a Service) companies like Salesforce attractive. "I'm a big proponent of this idea," the analyst said. If the company manages to grow the customer base of its Agentforce AI platform from its current 8,000 customers to 14,000, he said, the valuation pressure that has long held the stock back could ease.

Rangan noted that he's betting on application software companies in general. "There are companies like Intuit, Salesforce, Adobe," he explained. - They don't have perfect stories, but they're compelling enough." He added that he also singles out ServiceNow, which can be categorized as both an application vendor and a platform developer.

The Goldman Sachs analyst remains optimistic while certain segments of the software development industry are struggling. Rangan stressed that many of his favorites in the market are now experiencing a depression rather than a bubble. This is especially true for application software companies, whose valuations have sagged significantly, while infrastructure-level players like Snowflake and MongoDB have been more resilient.

Shares of Intuit, a software developer for accountants, are up just 6% YTD, while the Nasdaq 100 index has gained 13%. Shares of Salesforce, a software developer for marketers, fell by a quarter, despite confident steps in the development of AI agents. Quotes of Adobe, a software developer for creative industries, have fallen by 20% since the beginning of the year.

But Rangan said the pressure on the sector could open up opportunities for long-term investors.

Among the riskier ideas, the analyst noted shares of cloud provider CoreWeave. "This is a high-risk bet on artificial intelligence infrastructure," Rangan explained. - "It's the only pure AI company and the only hyper-scale cloud provider in the public segment. Because CoreWeave has a significant amount of debt on its balance sheet, it could benefit from lower interest rates if it refinances, Yahoo Finance writes. Rangan said CoreWeave's key advantage is its ability to rapidly deploy AI clusters, allowing enterprise customers to bring products to market quickly.

However, this strategy will only work if the company manages to maintain an advantage in time-to-market for new clusters. Rangan drew a parallel to the early years of Amazon Web Services, but cautioned: success will depend on flawless implementation.

Rangan said the bubble inflating is more about private markets rather than public companies in the software sector.

"If there is a bubble, it is more characteristic of the private segment - venture capital investment, startup valuations," he said, noting that players such as OpenAI and Anthropic are still in the active investment stage with an unobvious business model.

At the same time, publicly traded software developers are already generating strong cash flows and stable revenues, even if market sentiment is not yet in line with their fundamentals, says a Goldman Sachs analyst.

This article was AI-translated and verified by a human editor