MW 7 software stocks that could benefit as AI gets cheaper to run

By Emily Bary

Microsoft and Salesforce could see greater adoption of their AI offerings if they pass cost savings on to customers. And Snowflake may benefit from a rise in database queries as AI proliferates.

Investors aren't yet sure what DeepSeek's artificial-intelligence advancements mean for semiconductor companies like Nvidia Corp. that have built huge businesses on supplying hardware for AI training.

But it's looking increasingly like DeepSeek's successes bode well for many corners of the software universe, as the Chinese AI startup indicated it's possible to develop and run AI tools at a lower cost than people previously assumed. This suggests U.S. companies running AI or AI-adjacent services could be able to realize cost advantages for themselves and for their customers.

Opinion: DeepSeek panic shows the S&P 500 isn't the safe investment people think

"We believe advancements in cost could drive price even lower and therefore adoption higher," BofA analyst Brad Sills wrote Tuesday.

Software stocks have had a bumpy ride in the AI era. While chip companies have already seen AI manifest into real revenue, many software companies are still waiting for the big windfall.

We've seen this story play out before in other technological waves, where hardware translates to big money at the outset before giving way to a burst of software and service offerings that couldn't exist without it. Apple Inc. $(AAPL)$ has built a great business with the iPhone, but now there are countless companies like Uber Technologies Inc. $(UBER)$ that have taken advantage of hardware innovations to create businesses that wouldn't be possible otherwise.

It's also worth noting that while DeepSeek is in the headlines now, U.S. companies have been making quieter progress on cost efficiencies. Morgan Stanley's Keith Weiss pointed to Snowflake Inc. (SNOW), which says it trained an open-source large language model with a budget of under $2 million for training compute.

Don't miss: Nvidia and other chip stocks are bouncing. Is now the time to buy?

Which companies stand to benefit from this wave of progress? BofA's Sills looked at the potential for companies like Microsoft Corp. $(MSFT)$ and Salesforce Inc. $(CRM)$, which offer AI agents that are meant to take on tasks on your behalf. Microsoft's Copilot Chat costs 1 to 30 cents per prompt, depending on how complicated the request is, Sills said, and Salesforce launched Agentforce for Service Cloud with a $2 flat fee for each conversion last fall.

"A lower cost of compute could bring down AI computing costs of sales and drive better margin on AI-enabled offerings," Sills wrote. "More importantly, agentic application providers could pass savings on to enterprises via lower price, which could provide a catalyst for adoption/proliferation of agents."

What about Adobe Inc. $(ADBE)$? Bernstein analyst Mark Moerdler acknowledged that while Adobe's creative competitors could also benefit from a lower cost of AI training, the company still has plenty of advantages. Meanwhile, Adobe would have the ability to offer AI functions on PCs and smartphones more cheaply, likely boosting demand and reducing its costs.

Moerdler also called out MongoDB Inc. (MDB) and Snowflake, two companies that play into data storage and management. They stand to benefit from reduced inferencing costs and a proliferation of small language models that get more businesses to create generative-AI applications. The number of database queries could rise as a result.

Peter Weed, Moerdler's Bernstein colleague, spotlighted a number of infrastructure software companies that could win out. For example, Okta Inc. (OKTA) makes software that helps people access tools for work. "And an agentic future would only increase the volume of applications that need to pull together to address AI answers or be engaged as part of agents taking action," he wrote.

Read: This man wiped $600 billion off Nvidia's valuation by marrying quant trading with AI

He also pointed to ServiceNow Inc. (NOW), which is "a bit more speculative" of a play here. "ServiceNow is trying to become an application platform on which you build self-help and service agent support tools to improve service desk productivity," Weed wrote, and while the company currently charges per seat, it's exploring a potential consumption model.

"If the inference of these seat models is cheaper, margins could benefit," he wrote. "Or if the consumption models can offer lower prices, the pace of uptake could increase." But Weed still has questions on "the balance of price times quantity," meaning how the hypothetical uptick in new volume would shake out against lower prices paid by customers.

-Emily Bary

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

January 28, 2025 11:58 ET (16:58 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.