According to HSBC, “software is already eating up AI” and will continue to do so, but the bank is ignoring recent market concerns about the sector being replaced by artificial intelligence. Software stocks tumbled earlier this month as widespread concerns that AI could make the software-as-a-service (SaaS) business model obsolete led to a selloff and warnings of an impending “SaaSpocalypse.” However, HSBC analysts said in a note on Tuesday that they do not expect software to be usurped by AI, but rather will be a major beneficiary of its developments. Consumer AI platform developers such as Google’s parent company Alphabet, ChatGPT maker OpenAI, and startup Anthropic have little experience creating “enterprise-class” software and “will be building from scratch in an unfamiliar and highly complex field,” the HSBC team said. On the other hand, it added that it is not practical, practical or economically sound for companies to use AI to develop their own in-house software systems. Even if vibecoding (using AI prompts to develop code) leads to the deployment of better or free software solutions, it will still be very difficult for these solutions to replace existing vendors running the day-to-day operations of global companies, HSBC said. “We believe that in serious enterprise applications, AI is destined to be subordinate to the entire software platform,” the bank’s memo said. “We have identified the party best suited to use AI to produce better software than existing legacy vendors. And, of course, that is the software vendors themselves.” Given recent market movements and investor sentiment, HSBC said it “could be timely” to build or grow a position in the software space ahead of the re-rating. “The sector is poised for significant expansion and we see strong demand momentum continuing for the foreseeable future, yet sector valuations remain at historic lows,” the research team said. “Although AI has benefited the hardware/semiconductor sector, we believe the majority of that value is being generated in the software sector, which has been planning and building agent AI for the past two years, with kickoff starting in 2026.” HSBC has a buy rating on a range of software stocks, many of which were caught up in this month’s selloff. These include Oracle, ServiceNow, Salesforce, HP, and CrowdStrike. Twilio, SAP, Fortinet, and Cisco have Hold ratings, and Palo Alto Networks, IBM, and CoreWeave have Reduce ratings.
