AI software stocks rally 5% as sector split deepens between winners and losers

AI application software stocks surged on June 26, extending a divergence that is cleaving the technology sector into two distinct trades.

ServiceNow and Figma each jumped more than 5%, leading a broad rally in AI software stocks that pushed Microsoft Corp. up 2% and lifted Palantir Technologies Inc., Adobe Inc., Workday Inc., Salesforce Inc. and Datadog Inc. by at least 3%. The gains came as the tech-heavy Nasdaq Composite fell 0.5%, dragged lower by a 6% slide in Apple Inc. after the iPhone maker raised prices on MacBooks and iPads.

"The market is finally distinguishing between companies that monetize AI through software and those that bear the hardware cost burden," said Alex Nguyen, enterprise AI analyst at Edgen. "Software margins scale; hardware input costs don't."

The divergence was on full display in the memory chip sector. Micron Technology Inc. jumped 15% after reporting fiscal third-quarter revenue that more than quadrupled to $41.46 billion, with gross margins surging to 84.6% from 37.7% a year ago — a stark illustration of pricing power shifting to chipmakers amid an industrywide shortage of memory components. Apple Chief Executive Officer Tim Cook told the Wall Street Journal last week that "unsustainable" memory costs could make price hikes "unavoidable," a warning that materialized with increases of $100 to $300 across its product lineup.

Why Software Wins When Hardware Squeezes

The rally in AI application software reflects a structural advantage: companies that embed AI into existing platforms can raise prices without proportionate cost increases. ServiceNow, which sells workflow automation tools, and Figma, the collaborative design platform, both benefit from AI features that improve user retention and average revenue per account. Microsoft's 2% gain came even as Stifel cut its price target to $400 from $415, with analysts noting that Azure growth and AI services continue to support the stock despite rising infrastructure spending.

By contrast, hardware-dependent firms face a cost squeeze. Apple's price hikes on the MacBook Air (up $200 to $1,299), MacBook Pro (up $300 to $1,999) and iPad Pro (up $200 to $1,199) followed a similar move by other device makers grappling with memory costs that have tripled over the past year. Wedbush analysts said Apple could be pushed to lift prices again soon, though they maintained an outperform rating and a Street-high target of $400, arguing demand for Apple products is largely inelastic.

What the Rotation Means for Investors

The S&P 500 closed unchanged at 7,357 on Thursday, masking the rotation beneath the surface. The Nasdaq Composite fell 0.5% to 25,359, its fourth consecutive decline, as mega-cap tech weakness offset gains in software and memory stocks. The 10-year Treasury yield dropped to 4.40% after the Federal Reserve's preferred inflation gauge, the core PCE price index, rose to 3.4% year over year — its highest since October 2023 — reinforcing expectations that the central bank may raise interest rates this year.

For investors, the takeaway is that the AI trade has splintered. Software companies with high gross margins and recurring revenue models are benefiting from AI adoption without bearing the input cost inflation that is squeezing hardware makers. Microsoft trades at roughly 30x forward earnings, a premium to the broader market that reflects its Azure and AI growth trajectory. Apple, at about 28x forward earnings, faces questions about whether price hikes can sustain growth without eroding demand. The divergence suggests that stock selection within the AI theme now matters more than sector-level exposure.

This article is for informational purposes only and does not constitute investment advice.