If you've been confused about the share price movements of some artificial intelligence (AI) stocks, join the club. Investors have been on a treasure hunt lately, seeking tech companies poised to benefit from massive AI disruption, but no one can really agree on what that looks like. Some think hardware-based companies will remain the leading AI stocks, while others are opting for software.
A recent HSBC report leans toward the latter. An analyst at the bank, Stephen Bersey, said recently that 2026 will be "the kick-off for monetization within software" for AI and the largest long-term share of value is in AI software, not hardware.
Here's why it's probably best to have a little of both.
Image source: Getty Images.
The case for AI software stocks
Bersey presents the case that enterprise software is not only deeply embedded in corporate operations but is also nearly error-free and highly reliable. This is, obviously, very important to companies that depend on software to run their businesses well. And it's in contrast to the more free-wheeling AI chatbots from OpenAI, Anthropic, and others that can be helpful, but also error-prone.
He mentioned on a podcast that people once worried that Microsoft would lose its dominance in enterprise software because Alphabet's (GOOGL 1.46%) (GOOG 1.52%) Google Workspace offered a free version of similar software tools. Instead, Microsoft software has continued to thrive, with Productivity and Business Process Software sales rising 16% to $34 billion in the most recent quarter and the company having 400 million Office 365 users.
NASDAQ: GOOGL
Key Data Points
For its part, Alphabet has made huge strides in AI with its Google Gemini chatbot reaching 750 million monthly active users, and the company scored a multibillion-dollar deal for Gemini to serve as the underlying AI model for upcoming versions of Apple's Siri. And Alphabet continues to benefit from more customers using AI by selling additional cloud services, leading to its cloud revenue rising 48% to $17.7 billion in the most recent quarter.
Should investors avoid AI hardware stocks?
Investors are understandably confused about whether software or hardware will benefit most from AI. But instead of picking a side, I'll offer up the suggestion: Why can't it be both?
Nvidia (NVDA 1.45%) recently reported its Q4 fiscal 2026 results in which data center revenue surged 75% higher to $62.3 billion and adjusted earnings per share popped 82% to $1.62. Those are very impressive results that outpaced Wall Street's consensus estimates, and more growth is likely on the way. Nvidia's management issued total revenue guidance of $78 billion for the first quarter, an increase of 77%.
NASDAQ: NVDA
Key Data Points
Even if you think some AI hardware stocks are played out, others are still scoring big wins. Nvidia competitor Advanced Micro Devices just announced a deal valued at more than $100 billion with Meta Platforms to buy 6 gigawatts of data center processors from AMD, with Meta potentially owning as much as 10% of AMD.
With Nvidia estimating data center spending could reach between $3 trillion and $4 trillion of annual infrastructure spending by 2030 and Alphabet already ramping up capital expenditures to up to $185 billion this year (mostly for AI infrastructure), Nvidia and AMD aren't finished benefiting from hardware investments.
I understand the concern that, at some point, the spending spree currently underway for AI hardware will slow. But trying to call the end early is a mistake. And even when it slows down, the spigots won't turn off entirely. Tech companies are likely locked into a many-years-long AI race that will be built on the advanced chips made by Nvidia and AMD.
Don't write off entire tech segments just yet
I think it's premature to rotate out of hardware stocks and pivot to software stocks this early in the AI stage. Paring back some holdings in order to spread some money around is probably a better bet. That means owning a little of Nvidia, as well as Alphabet, is probably a wise move right now as AI continues to take shape.
