Nvidia Takes a Hit: Why AI Investors Are Moving Away from Chips to Software

U.S. chip stocks, which enjoyed the spotlight during last year's AI investment boom, have taken a noticeable hit this year as investors shift focus to software companies—the emerging engine of AI value creation. 

Tariff‐driven volatility and a dimming demand outlook, compounded by the emergence of lower‐cost AI models from China's DeepSeek, have put pressure on semiconductor shares. 

For example, the Philadelphia Semiconductor Index has fallen about 6% year‐to‐date, and industry leader Nvidia NVDA has dropped nearly 14% from its recent December high.

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Software Momentum Rising

Meanwhile, the software sector is showing robust gains. Companies such as Atlassian TEAM, CrowdStrike Holdings CRWD, Palantir Technologies PLTR, and Cognizant CTSH have surged between 7% and 19% this year, reflecting growing investor confidence in AI-driven applications. 

Capital flows further illustrate this shift. The iShares Expanded Tech-Software Sector ETF IGV has attracted over $1.87 billion in inflows through Feb. 28, while both the iShares Semiconductor ETF SOXX  and the VanEck Semiconductor ETF SMH have seen over $1 billion in outflows each. 

In 2024, the iShares Expanded Tech-Software Sector ETF experienced significant inflows, including a $277 million addition on Oct. 14. The VanEck Semiconductor ETF also saw substantial growth, with a 40.4% year-to-date increase as of Dec. 23, driven by rising demand for AI applications and cloud computing.

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According to Reuters, this rotation appears to be a natural progression. Adam Turnquist, chief technical strategist at LPL Financial, explained that "the shift is a natural progression for AI investing—as the use cases for AI evolve, the true revenue drivers are emerging in software applications." 

In addition, Morgan Stanley equity analyst Keith Weiss said, "We're now starting to see the ascendancy of the software part of the equation, as companies begin to monetize their AI solutions effectively."

Yet, caution remains regarding the indispensable role of semiconductor hardware. According to Investors Business Daily, while software revenues offer stability, the performance of Nvidia's GPUs is critical for powering AI, and no clever software can fully compensate for a basic lack of processing power. 

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DeepSeek's launch of a lower-priced chatbot has intensified competitive pressures. Goldman Sachs analyst Ryan Hammond said, according to Investor's Business Daily, that "the AI trade will broaden and that stocks with AI-enabled revenues offer better risk/reward for new capital than those involved in infrastructure"

Escalating Sino‑U.S. trade tensions and export restrictions add further uncertainty to the chip sector, prompting many to see software investments as a more stable, long-term opportunity. 

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