Attention is slowly shifting from US chip stocks to what analysts consider as the next big AI play: software. Investor enthusiasm has begun waning for semiconductor stocks due to tariff-driven volatility and the emergence of lower cost AI models from China’s DeepSeek. The AI chips transition is now paving the way for the second stage of the innovation cycle where software companies will begin to monetize AI breakthroughs.
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“The second stage of the innovation cycle is when people start utilizing products and that’s when the software companies start getting paid … we’re now starting to see the ascendancy of the software part of the equation.”
-Keith Weiss, equity analyst at Morgan Stanley.
Previously, software startups such as Harvey were dismissed by Silicon Valley investors. Investors used to take these software firms lightly, stating them as mere wrappers around OpenAI’s models. However, now the narrative is shifting and these AI wrappers are becoming quite popular today.
“The market’s perception of companies like us… was that they’re GPT wrappers, referencing a derisive term used to suggest the repackaging of OpenAI’s models. If investors “were going to put money into something,” he added, “it needed to be into OpenAI or Anthropic.”
-Harvey, Chief Executive Officer Winston Weinberg
Here is what another investor has to say:
“Just like after the iPhone launched, there were millions of new mobile apps,” said Mignano, an investor in the AI notetaking service Granola, which uses technology from OpenAI and Anthropic. “Now with AI and LLMs, there will be millions of new AI products.”
-Michael Mignano, a partner at Lightspeed Venture Partners
DeepSeek has also played its due part in leading the shift from chip stocks to software and similar AI plays.
“Investors are looking for the next three-to-five-year stories … those companies that are going to benefit from what Nvidia has already done.”
David Russell, global head of market strategy at TradeStation.
For this article, we selected AI stocks by going through news articles, stock analysis, and press releases. These stocks are also popular among hedge funds. The hedge fund data is as of Q4 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
A trader cheers his market gains. Photo by Tima Miroshnichenko on Pexels
10. BigBear.ai Holdings, Inc. (NYSE:BBAI)
Number of Hedge Fund Holders: 13
BigBear.ai Holdings, Inc. (NYSE:BBAI) is an artificial intelligence specialist that provides decision intelligence solutions. On March 7, H.C. Wainwright lowered the firm’s price target on the stock to $6 from $7 and kept a “Buy” rating on the shares. The rating, issued after the company reported its Q4 results, analyzes how the company’s 2025 outlook reflects on a slowly materializing revenue.
Nevertheless, sectors in which BigBear.ai operates such as border security, defense, and critical infrastructure, are expected to receive increased investment. This will benefit the company in the long run. Financial restructuring is also expected to relieve pressure from the stock. Keeping a buy rating, the firm views “enough positives” that would allow any short-term pullback to be seen as an opportunity to buy the shares.
9. Palantir Technologies Inc. (NASDAQ:PLTR)
Number of Hedge Fund Holders: 63
Palantir Technologies Inc. (NASDAQ:PLTR) is a leading provider of artificial intelligence systems. On March 6, Palantir Technologies Spain announced a partnership with EYSA, a leader in comprehensive sustainable mobility solutions, to enhance mobility application development. The agreement was finalized after a successful pilot test through a multi-week Palantir bootcamp, where EYSA confirmed the success of Palantir’s Foundry and AIP platforms in addressing complex questions, planning scenarios, and facilitating and accelerating the development of new mobility applications.
The integration will enable all areas and businesses to work autonomously in a private and highly secure environment that operationalizes data and artificial intelligence. To conclude, the alliance will enable technological transformation in the mobility sector in Spain and beyond.
“Building on the strong Ontology foundation that EYSA has already consolidated in Palantir Foundry, we are thrilled about EYSA’s potential for accelerating the development of sustainable and more efficient urban mobility solutions leveraging the power of Palantir AIP. After just a few months, EYSA is already pioneering new use cases, capturing emerging business opportunities which will reinforce its lead position in creating smarter, safer and more sustainable cities.”
-Javier Fernández Castañón, Head of Commercial at Palantir Spain.