The AI trade is shifting from chip stocks to cybersecurity

Summary

Software leaders got a big boost this week and chip stocks were crushed as the AI tech investing landscape continues to shift.

So much for the so-called SaaSpocalypse.

Shares of large software-as-a-service companies, such as cybersecurity firms CrowdStrike and Palo Alto Networks—a Barron’s stock pick in June—were among the top-performing stocks in the S&P 500 this week, with each surging more than 10% during a volatile couple of days for the tech sector and broader market. Elsewhere in the software sector, ServiceNow and Workday each also rose more than 10%.

Meanwhile, chip stocks got crushed. Semiconductor equipment company Lam Research plunged 13% this week after warning of supply constraints. It’s another sign that the landscape for winners and losers in the artificial-intelligence trade is constantly shifting. Several other semiconductor companies, including Lam rival KLA and AI chip and infrastructure firms Cerebras Systems and Credo Technology, all fell more than 10%.

Meanwhile, the iShares Expanded Tech-Software Sector exchange-traded fund and the First Trust NASDAQ Cybersecurity ETF rose 6% and 7% this week, respectively, while the iShares Semiconductor ETF fell 3%. (The broader market ended the week mixed, with the Dow notching a 0.4% gain and the S&P 500 and Nasdaq marking respective losses of 0.5% and 0.7%.)

Investors, at least for now, seem to be gravitating toward companies that are expected to get a big boost in demand thanks to AI. Think cybersecurity as worries about data breaches and other concerns about rogue AI agents mount. Enterprise software firms are rebounding following a slide earlier this year due to fears—that now appear to have been overblown—about how AI could make big corporate software firms obsolete.

Along those lines, shares of hard drive maker Western Digital fell Friday despite reporting solid earnings. The stock is up nearly 100% this year.

Write to Paul R. La Monica at paul.lamonica@barrons.com