AI Software

Sector thesis

AI Software is the layer of programs and tools that let businesses and people actually *use* AI models to solve real problems—everything from chatbots and image generators to code assistants and data analysis platforms. It's the difference between having a powerful engine (AI compute, which we track separately) and having a working car. Right now, this sector is booming because companies are moving past the "let's experiment with AI" phase into "how do we build this into our actual products and workflows?" That shift is the real megatrend. Businesses need software that integrates AI into their existing systems—customer service, marketing, design, software development—without requiring a PhD in machine learning. The winners will be companies that make AI accessible and profitable for ordinary enterprises. Within AI Software, there are three main buckets: (1) **Vertical solutions** — software built for specific industries like healthcare, finance, or manufacturing that bakes in AI for their exact needs; (2) **Horizontal platforms** — general-purpose tools (think AI-powered spreadsheets, writing assistants, or coding helpers) that work across many industries; and (3) **Infrastructure software** — the plumbing that helps companies manage, secure, and deploy AI models at scale. The biggest risk is that this market moves *fast*. A tool that seems essential today can become obsolete in 18 months if a competitor ships something better. Also, many of these companies are still unprofitable—they're spending heavily to build and acquire customers. If growth slows or interest rates stay high, valuations could compress hard. For a retail portfolio, watch whether these companies are growing revenue *and* moving toward profitability, not just burning cash on growth. Look for recurring revenue (subscriptions are more stable than one-time deals) and whether customers are actually expanding their use over time. This sector belongs in a growth-focused portfolio, but size positions accordingly—volatility is real.