If Artificial Intelligence Is in a Bubble, These Are the Stocks That Could Benefit Most

Few developments have had as big an effect on the stock market over the last four years as the advancements in artificial intelligence. The promise of productivity improvements from AI has driven significant spending on the technology, including new data centers and equipment to outfit them. However, the market has started to waver in recent weeks, amid fears that all that spending might not pay off in the long run.

Semiconductor stocks are technically in a bear market after falling more than 20% since late June. Hyperscalers are under increasing scrutiny as capital expenditures push free cash flow into negative territory. The results have some investors asking whether artificial intelligence is in a bubble.

If there is an AI bubble, it could lead to further pressure on semiconductor and hyperscaler stocks. One sector that could benefit currently looks extremely cheap, and it's worth buying now regardless of whether there's an AI bubble.

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The stocks that could benefit from too much spending on AI

Earlier this year, software stocks tumbled as investors feared artificial intelligence services like Anthropic's Claude Code could cut into their growth. Many analysts re-rated the value of current earnings because they felt future earnings growth wasn't as predictable as it had been for many software-as-a-service (SaaS) companies.

The market indiscriminately sold off software stocks, with the iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV) dropping nearly 30% from the start of the year through early April. While the sector has bounced back over the last few months, there are still plenty of values in software.

If there is an AI bubble, those companies hit hardest by the software sell-off earlier this year could be some of the biggest beneficiaries. First of all, it might suggest that AI isn't as capable of fully replacing existing enterprise software solutions as feared. While many SaaS stocks have considerable moats that would protect their businesses against AI disruption, the fear of AI disruption has remained a significant overhang on stock prices.

Second, software companies integrating generative AI tools into their core offerings may be able to access the compute power needed to run those features at significantly lower cost. If hyperscalers overbuild and there's not enough demand to meet the supply, they may be willing to sell access to their services at a lower price. That would transfer gross margin from hyperscalers to their customers, like software companies.

Not every software stock will be a winner. But large software companies with considerable free cash flow and low valuations could be well-positioned to benefit from capital market trends, potential operational flexibility, and financial wherewithal.

Some potential winners if investors move away from AI stocks

If investors move capital away from the biggest AI winners, like semiconductor stocks and hyperscalers, they may want to stay in the tech sector. As such, software stocks trading at attractive valuations could be natural landing spots for many.

Some of the most beaten-down stocks have already seen significant share price recoveries, including Adobe (NASDAQ: ADBE) and Salesforce (NYSE: CRM). Even after a recent increase in price, the two stocks trade for forward price-to-earnings (P/E) ratios of 10.3 and 13, respectively. Meanwhile, both are producing solid free cash flow: $10.3 billion for Adobe over the last 12 months, $14.7 billion for Salesforce.

Both stocks are down due to fears of slower growth. Analysts expect revenue growth of just 9% per year for both companies. Management continues to deliver growth above expectations, but investors remain worried about the future. Salesforce expects revenue to accelerate in the back half of the year after posting growth of 12% in the first quarter. Adobe grew revenue 13% last quarter while showing strong progress on its top-of-funnel freemium offering, which should support long-term revenue growth.

Additionally, both are using AI to improve their products, increasing their utility and expanding their moats compared to smaller competitors. Adobe offers its own Firefly model, which is trained on its stock photos and videos. Salesforce introduced Agentforce, which uses its Data Cloud to automate some operations within its software.

These are just two examples of opportunities in the software sector. Investors could buy the whole lot with the iShares software sector ETF, but those who buy the highest-quality software stocks could do even better.

Adam Levy has positions in Adobe and Salesforce. The Motley Fool has positions in and recommends Adobe and Salesforce. The Motley Fool recommends the following options: long January 2028 $330 calls on Adobe and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.