Insights
In this episode of From the Bottom Up, Adam Xiao, Portfolio Manager and Senior Research Analyst and Steve Rigali, Executive Managing Director examine how artificial intelligence is reshaping technology investing, particularly the shifting dynamics between hardware and software companies.
Hardware vs. Software: A Changing Market Narrative
For much of the past two decades, software has outperformed hardware, supported by better business economics and recurring revenue models. Recently, that dynamic has reversed, as investors have rotated toward hardware companies tied to data center buildout while reassessing the competitive risks AI may pose to software.
AI as a Catalyst for Capital Reallocation
We believe recent advances in AI‑assisted development have meaningfully accelerated productivity and helped drive significant capital investment into semiconductors and infrastructure. At the same time, in our view, concerns that AI could lower barriers to software development have led to broad selling pressure across the sector, often without sufficient differentiation between businesses with durable competitive advantages and those more exposed to disruption.
Staying Disciplined Across Cycles
While hardware has led in the current environment, its underlying characteristics—customer concentration, capital intensity, and inherent cyclicality—remain unchanged. For long‑term investors, we believe this reinforces the importance of focusing on differentiated businesses across both hardware and software, rather than positioning portfolios around shifting market leadership. Periods like this can create opportunities to add to high‑quality companies when sentiment diverges from fundamentals.
Watch the full episode to hear the complete conversation.
Chapters:
- 0:04: Perspective: AI and the Shift in Technology Leadership
- 1:33: What Changed: AI as a Market Catalyst
- 3:40: Why Hardware is Back in Focus
- 5:27: Structural Risks in Hardware Investing
- 8:18: Is AI Demand Changing the Hardware Cycle?
- 11:32: The SaaS Selloff and Changing Sentiment
- 13:07: What Makes Software Durable
- 14:55: Real-World Example: Deep Customer Integration
- 19:58: Closing Thoughts: Long-Term Discipline in a Thematic Market
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