Software and Artificial Intelligence

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Software is crucial to Artificial Intelligence (AI) as it provides the framework and tools for developing, implementing, and managing AI systems. AI algorithms are essentially software code, and the underlying infrastructure, data processing, and user interfaces of AI applications are all built using software. Think of it this way: AI without software is like a car without an engine. In essence, software is the backbone of AI, enabling the development, deployment, and ongoing operation of intelligent systems. It's not just about algorithms; it's about the entire ecosystem of tools, infrastructure, and applications that make AI a reality, according to software and AI experts. Two leading software companies held in BWA's Thematic Growth portfolio (BWATG) are Palantir and SalesForce. The Computer Software-Enterprise industry group. They are 2 of the 3 largest companies is the group of 122 stocks. The industry group currently ranks #44 out of the 197 groups I monitor. Here are some key reasons to focus on software companies now.

• These companies have an opportunity to increase their competitive advantage as they acquire or build proprietary AI systems and maintain unique data sets. In other words, companies can differentiate from rivals by building unique AI systems using data they have.
• The software sector is also ripe with emerging AI technologies that can serve every industry. At the center of booming AI demand will be agentic AI, which can make decisions and take action. These tools, for example, can be built to manage and improve inventory, help developers code, assist doctors with patient care and even help design architecture.
• Software companies can more easily keep up with the AI boom because they can rapidly scale to meet demand, since most rely on central cloud storage rather than expensive hardware. This also means they can grow customer bases without big increases to their operating costs. For this reason, software companies tend to have higher profit margins, with the median subscription profit margin being about 80%.
• Software companies also tend to have recurring revenue because most of them run subscription-based businesses where payments are made monthly or annually. This reduces investment risk because there’s more predictability when forecasting the company’s future cash flows. Furthermore, software companies that operate in niche industries and deploy AI-enhanced solutions are even better investments because it’s more difficult for their customers to switch to a different provider, since it’s expensive to change a company’s entire system. Therefore, these software companies tend to see less customer turnover, making their future cash flows even more predictable.

Within the software sector, there are two main categories — enterprise and consumer-facing applications — and investors should pay attention to both. Examples of enterprise software companies are, as noted above, Palantir and SalesForce. An example of a consumer-facing software maker is tax-software provider Intuit Inc.

Security and Reliability:
Lastly, there is a fast growing need for more security and reliability with the rapid use of AI. Software must be designed with security in mind to protect AI systems from cyber threats and ensure the reliability of AI-powered applications. Software plays a crucial role in safeguarding user data and ensuring compliance with privacy regulations when using AI systems.

A stock portfolio without AI software holdings is like a garden without flowers.

John J. Gardner, CFP®, CPM®
Blackhawk Wealth Advisors
3860 Blackhawk Rd, Ste. 160
Danville, Ca. 94506
888.985.PLAN (7526)

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