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US Investors Shift Focus from Chipmakers to Software Amid AI Investment Evolution

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As the AI investment boom slows, U.S. chip stocks, which were the biggest beneficiaries of last year’s surge, are struggling in 2025. The spotlight has shifted to software companies, which are now seen as the next big play in AI. This shift comes as volatility driven by tariffs and concerns about diminishing demand, coupled with the rise of lower-cost AI models from China’s DeepSeek, have weighed on semiconductor shares.

The shift towards software is being viewed by several analysts as a long-term evolution of the AI investment landscape. According to David Russell, global head of market strategy at TradeStation, there’s been a noticeable “rotation” in investor focus, especially in light of the developments surrounding DeepSeek, the semiconductor outperformance of 2024, and the ongoing restrictions on U.S. chip exports to China. “Investors are looking for the next three-to-five-year stories… those companies that will benefit from what Nvidia has already done,” he added.

So far in 2025, the Philadelphia SE Semiconductor index has fallen 5.6%, with Nvidia, a major player in the industry, down nearly 13%. In contrast, several software companies have seen significant gains, with stocks like Atlassian, CrowdStrike Holdings, Palantir Technologies, and Cognizant rising between 7% and 19%. Exchange-traded funds (ETFs) tracking software companies have also seen substantial inflows. For example, the iShares Expanded Tech-Software Sector ETF has attracted over $1.87 billion in 2025, already surpassing last year’s total inflows.

Analysts argue that this shift is a natural progression for AI investments, as the primary use cases for AI technology are in software. Adam Turnquist, chief technical strategist at LPL Financial, emphasized that LPL prefers software stocks over semiconductors, a sentiment shared by Morgan Stanley. “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,” said Keith Weiss, equity analyst at Morgan Stanley.

This trend is driven by concerns about how long chip stocks can sustain their growth rates, with some investors rethinking the value of these stocks as software companies continue to improve their market position. The rise of DeepSeek’s more affordable chatbot, which competes with expensive direct-to-consumer AI products, is one factor contributing to a more cautious outlook on semiconductors. According to Brian Mulberry, portfolio manager at Zacks Investment Management, competition will likely reduce profits for these products, while enterprise software companies may find it easier to monetize new AI technology.

The shift toward software stocks is also influenced by the ongoing Sino-U.S. trade tensions, which have hurt semiconductor companies. Analysts have named companies such as Palantir, Microsoft, Oracle, and Salesforce as key players in the software space, though their performance has been mixed in 2025. Palantir, which offers AI software to businesses, has seen its stock rally, while Microsoft and Salesforce have struggled, down 4.9% and 12.6%, respectively.

Despite these fluctuations, some investors remain optimistic about the long-term prospects for software companies. While valuations for software giants like Microsoft and Oracle are still considered high—trading at 27 and 23 times forward earnings, respectively—investors like Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, argue that the focus should be on AI applications, not just chips. “We don’t need more Nvidia chips, we need applications,” she said.

Dutch Prime Minister Vows Support for Tech Startups Amid Slowing Growth

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Dutch Prime Minister Dick Schoof announced plans to strengthen the Netherlands’ technical startup sector, aiming to attract more venture capital following industry concerns about slowing growth.

Speaking at TechLeap’s annual event in The Hague on Wednesday, Schoof highlighted his government’s intention to cut regulatory red tape and increase investments in artificial intelligence. However, he did not provide specific details on the proposed measures.

“The alarming thought, of course, is that as Europe, we are let down, and we cannot keep up with the United States and China. We have to do something about it,” Schoof emphasized. “We have to make sure that … we create an environment in which venture capital is going to invest.”

The Dutch economy, particularly reliant on chip equipment manufacturing and home to ASML—the world’s largest chip equipment maker—has benefited significantly from the technical startup ecosystem concentrated in Eindhoven. The city has helped bolster the economy amid economic challenges in neighboring Germany.

TechLeap’s latest research indicated that venture capital investments in Dutch startups rose by 47% to 3.1 billion euros in 2024, positioning the Netherlands as the fourth-largest market in Europe behind Britain, Germany, and France. However, the U.S. remained far ahead, with $190 billion in investments according to DealRoom data.

Despite the rise in overall venture capital, the number of Dutch startups receiving significant funding declined, with only 104 companies securing investments of over 100,000 euros in 2024, down from 172 in 2023. The majority of this funding came from foreign investors.

Two Dutch companies achieved unicorn status in 2024, attaining private market valuations exceeding 1 billion euros. These firms were Mews, a hotel software developer, and DataSnipper, which uses AI to automate auditing functions.

Connection Challenge Could Hamper France’s AI Hub Ambitions Despite Nuclear Power Advantage

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France’s bid to become a global leader in artificial intelligence (AI) is facing potential setbacks due to delays in connecting power-hungry data centres to the national electricity grid. Despite boasting abundant nuclear energy—critical to attracting AI investments—the time it takes to establish the necessary infrastructure could slow down the country’s growth in the sector.

Macron’s Vision and Investments:

In a recent AI summit, French President Emmanuel Macron highlighted the country’s reliance on clean and reliable nuclear power as a key asset for AI development. With over 100 billion euros ($103.26 billion) in AI investment pledges, France is positioning itself as a major player in Europe’s race to catch up with the U.S. The pledge includes a $10 billion supercomputer facility by UK-based Fluidstack, which will require 1 gigawatt (GW) of power—equivalent to the output of one of France’s smaller nuclear reactors.

Brookfield, a global asset manager, also committed to spending 20 billion euros to develop AI infrastructure, including data centres. With 57 nuclear reactors, France produces over two-thirds of its electricity from nuclear power, and last year, it exported a record amount of energy, mostly to Italy.

Grid Connection Bottleneck:

The challenge lies not in generating the electricity but in connecting it to the data centres. France’s energy grid, though robust, may struggle to keep up with the surge in demand that AI data centres will bring. Experts warn that, while building data centres can be completed in under a year, constructing the necessary transmission lines to supply them with power could take up to five years.

Fatih Birol, executive director of the International Energy Agency, highlighted the issue at the AI summit, noting that countries with sustainable and affordable electricity supplies have a competitive edge. However, the slow pace of building the required transmission infrastructure presents a bottleneck for France’s ambitious plans.

Efforts to Expedite Construction:

Construction and permitting procedures in Europe are notably slower than in the U.S., as Anj Midha, a general partner at Andreessen Horowitz, pointed out. In response, state-owned utility EDF has identified four sites for data centres on its land, with existing grid connections and 2 GW of power already available. These sites are expected to reduce project timelines by several years, but challenges remain.

EDF is also in talks with companies to power additional 1 GW data centre projects, though the completion of these sites may still be delayed by the need for public consultation and the high costs associated with constructing new high-voltage power lines.