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Software stocks have been hammered out of the gate this year. One big fear behind it is essentially carried over from 2025: that fast-moving AI will kill off software companies over time.
Snowflake (SNOW) CEO Sridhar Ramaswamy said investors should distinguish between software and data players.
“Data platforms are also a little bit different from pure software stocks, and I think the data layer will continue to rise in importance,” Ramaswamy told me on Yahoo Finance (video above).
The concern has piled up on software in particular.
The weight of the top 10 stocks in the S&P 500 (^GDSP) has recently seen some “major deterioration” relative to the rest of the stock market, RBC Capital Markets strategist Lori Calvasina pointed out.
Information technology is trading at its lowest valuation premium to the S&P 500 in the post-pandemic environment, according to Evercore ISI data. The price-to-earnings multiple for the “Magnificent Seven” is in line with its post-pandemic average, while the other 493 stocks in the S&P 500 are trading near their all-time high valuations.
Ramaswamy added, “I think there will be durable value in big software providers as well. So I think the effect is a little bit overblown, but we feel very good about where we are because the data platform is the key to helping enterprises unlock value, and us working together with OpenAI (OPAI.PVT) and Anthropic (ANTH.PVT) feeds into that equation.”
None of this AI fear has been proven in the financials of software companies. Earnings have been strong. Same goes for outlooks. And many software players are innovating at a pace like never before to capture opportunities in AI.
As for Snowflake, today it announced a new $200 million deal with OpenAI to bring its state-of-the-art models directly to the company’s platform. In December, Snowflake signed a similar deal with Anthropic, also valued at $200 million.
Snowflake also revealed another new product called Cortex Code, which it fancies as an AI coding agent.
In December, the company reported its third quarter product revenue rose 29% from the prior year. Its client retention rate stood at a healthy 125%.
Snowflake stock is still down 12% year to date.
“Snowflake will continue to capture outsized share of the cloud data platform market and associated data analytics projects,” Goldman Sachs analyst Gabriela Borges said.
Borges has a Buy rating on Snowflake, with a $286 price target, which projects about 49% upside from current levels. Yahoo Finance data shows an average Wall Street price target on Snowflake of $281.