Services and software companies poised to generate sustained, long-term earnings from the AI trend are expected to be at the forefront of this year’s tech boom, according to Lukasz de Pourbaix, global cross-asset specialist at Fidelity International.
The global tech sector is forecast to present numerous opportunities in 2025, with software and services firms predicted to be the “underappreciated beneficiaries” of the AI revolution.
This, according to de Pourbaix, includes IT service companies that could help with AI deployment, cloud service providers that could generate annuity revenue streams once customers build AI workloads in the cloud, software companies that could monetise AI functionality, and customer service software and business process outsourcing companies with domain expertise.
“These companies are well positioned to generate durable earnings stream, with AI as a long-term growth driver, but which are not reliant on a rapid pace of adoption,” he said.
Elaborating on this in conversation with InvestorDaily, de Pourbaix said that software companies, in particular, continue to lead innovation within many industries – ranging from SaaS (software as a service) providers, consumer technology platforms, digital music platforms and medical technology.
“This trend is likely to continue as we continue to digitise various aspects of our lives,” he said.
“Company revenue streams have benefited from SaaS creating steadier more predictable revenue streams and software has become embedded in many business processes providing increased resilience to software providers in economic downturns.”
In a note penned late last year, State Street highlighted that while software firms faced uneven ground in early 2024, the sector itself continues to be viewed as one of the “best hunting grounds for high-quality companies”.
“For investors who are able to be patient, we believe the software space remains an attractive and high-quality area for investment that can benefit from AI tailwinds over the medium term,” State Street said in October.
Fast forward a few months and software stocks closed strong in 2024, with companies like Salesforce, ServiceNow and Palantir Technologies posting significant returns driven by demand for generative AI.
In their recent analysis, Deutsche Bank analysts projected continued growth for the sector, driven by enterprise investments in productivity tools, which are fuelling optimism for the space.
Tech abundant in opportunities
Looking at other areas within tech, de Pourbaix emphasised the sector’s diversity, highlighting that it “provides opportunities across all sectors, industries and geographies”.
“This theme benefits from long-term structural trends, including shifts towards cloud computing, industrial software, artificial intelligence and gaming, among others,” he said.
“Tech deployment is taking place across all areas of economic activity and has the potential to create value across a diversified pool of businesses.”
According to de Pourbaix, opportunities exist in both the US and China. Favourable US policy changes are benefiting tech companies and non-US firms with US exposure, while Chinese internet companies continue to gain strength despite the challenging macroeconomic environment.
“China’s industry-leading internet platforms have strong fundamentals with good management teams and prudent capital allocation. These internet companies retain strong positions and earnings power despite a tough macro environment, and the recovery potential is very underappreciated,” de Pourbaix said.
“With the current depressed cyclical environment and low valuations, the risk-reward looks compelling in the China internet space.”
