The U.S. software market has seen significant growth, with a 59% increase in 2023 and a further 23% in 2024. However, Bank of America (BAC) analysts have cautioned that these development projections are still below historical averages. In their January 14 report, as noted by TheStreet, BofA highlighted that revenue multiples and growth expectations in the sector remain below the 5-year median and pre-Covid levels, suggesting a cautious optimism tempered by current market realities.
Bank of America identifies three secular themes that could propel the software industry forward in 2025: Agentic AI, expanding enterprise IT budgets, and the ongoing migration to cloud services. Agentic AI, which involves systems capable of autonomous learning, action, and decision-making, is seen as a pivotal technology. The potential for these AI systems to replace human workers in areas like contact centers and software engineering by the second half of 2025 underscores their transformative impact.
Enterprise IT spending is also on an upward trajectory, with tech giants like Meta (META), Microsoft (MSFT), and Amazon (AMZN) leading the charge. Microsoft’s finance chief, Amy Hood, has acknowledged the high demand for their services, indicating a trend that’s likely to continue. This increase in IT expenditure is part of a broader movement towards digital transformation across industries.
Cloud migration, despite some optimization challenges, continues to be a robust growth driver. As companies look to streamline operations and reduce costs, the shift to cloud services offers scalability and efficiency, setting the stage for further sector growth.
Bank of America remains bullish on the software sector for 2025, especially in the latter half of the year, when these accelerating secular trends and easing cyclical pressures are expected to converge. The firm has named Salesforce (CRM) as its top pick for 2025, citing its leadership in customer relationship management and its innovative use of AI. Salesforce’s recent introduction of Agentforce 2.0, a platform that automates customer support, exemplifies this AI integration, serving clients like IBM, Finnair, and Heathrow Airport to enhance operational efficiency.
Despite missing earnings expectations slightly in its fiscal third-quarter results – excluding certain items, profit came in at $2.41 per share, marginally below the $2.44 analysts had forecasted – Salesforce’s revenue beat forecasts – $9.44 billion vs. analysts’ average estimate of $9.35 billion – leading to an upward revision in its fiscal 2025 guidance. This adjustment was met with an 11% surge in its stock price – last trading up $4.84 or 1.51% at $326 p/sh – reflecting investor confidence in Salesforce’s strategic direction, particularly its focus on AI with platforms like Agentforce.
BofA also recommends other stocks like HubSpot (HUBS), Microsoft (MSFT), ServiceNow (NOW), Datadog (DDOG), GitLab (GTLB), Global-e Online (GLBE), Five9 (FIVN), Monday.com (MNDY), and Asana (ASAN), each positioned to benefit from the trends outlined. These companies are seen as undervalued or particularly well-positioned in subsectors like CRM and infrastructure, which are ripe for growth.
This analysis by Bank of America suggests that while the software sector faces challenges, the combination of technological innovation, particularly in AI, alongside strategic investments in IT and cloud services, positions the industry for a promising 2025. However, the sector’s performance will hinge on how effectively companies can adapt to and leverage these emerging trends amidst a complex economic backdrop.
h/t TheStreet
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