AI Software Stocks Rally Over 8% as Focus Shifts From Chips

A broad rally in artificial intelligence application software stocks on Tuesday, which saw shares of Roblox (RBLX) and Zeta Global (ZETA) jump more than 8 percent, signals a potential market rotation from the AI infrastructure builders to the companies now using those tools to create value.

The move reflects a strategy identified in the recent 13-F filings of Whale Rock Capital Management, a technology-focused hedge fund known for making early, concentrated bets on tech shifts. "Alex Sacerdote doesn’t chase trends. He positions ahead of them, then waits for everyone else to catch up," a recent Benzinga report noted, highlighting the firm's 54 percent return in 2024 from betting on AI infrastructure before it was a consensus trade.

The rally on May 18 included a more than 6 percent gain for enterprise software firm ServiceNow (NOW), while the iShares Expanded Tech-Software Sector ETF (IGV) climbed nearly 1 percent, building on a 10 percent gain for the month. The gains suggest growing investor confidence in the monetization and adoption phase of artificial intelligence.

For investors, this shift indicates the AI trade is maturing from a pure bet on semiconductor and cloud providers to a more nuanced play on software platforms that can demonstrate clear revenue growth. It marks the next potential ‘S-curve’ of growth in the sector, moving from the foundational layer to the application layer.

Beyond Nvidia: The ‘Picks-and-Shovels’ Play

While household names like Nvidia and Microsoft dominated the first wave of AI investment, Whale Rock's recent acquisitions suggest a pivot towards the less-covered infrastructure that enables the entire ecosystem. The firm's conviction, built on what it calls an "S-curve" approach to identifying technology inflection points, is now focused on the "stocks behind the stocks."

According to its latest filings, the fund has been building positions in five key names:

Viavi Solutions (VIAV): A provider of testing and monitoring equipment for optical networks, essential for handling the data explosion from AI.
Advanced Energy Industries (AEIS): Supplies power conversion systems used in semiconductor manufacturing, a direct beneficiary of increased chip production.
MKS Instruments (MKSI): A supplier of process technologies and manufacturing tools for semiconductor fabrication.
Klaviyo (KVYO): A marketing automation and customer data platform that helps e-commerce businesses use first-party data.
JFrog (FROG): A DevOps platform that manages the software supply chain, critical for deploying AI models securely and efficiently.

From Infrastructure to Application

The initial AI boom was fueled by massive capital expenditure on the foundational infrastructure: the GPUs from Nvidia, the cloud services from Amazon, and the data centers that house them. This created a rising tide that lifted a few key players to trillion-dollar valuations.

However, the rally in application-focused companies like ServiceNow and Roblox, which uses AI for content creation and moderation, suggests the market is now asking "what's next?" Investors are beginning to reward companies that can translate AI capabilities into tangible products, services, and revenue streams. This second wave is not about building the tools, but about who can use them most effectively to gain market share and drive growth.

This article is for informational purposes only and does not constitute investment advice.