The truest line of 2026 so far is that "hardware is the new software." Which has a delightful ring to it. It's somewhat amusing that the least sexy of industries--memory and storage--is now hotter than the likes of Salesforce, Workday, and Adobe.
Let's put this shift into perspective. Shares of Western Digital are up 400% in the past year. Seagate? 323%. Meanwhile, Salesforce is down 37%--and worse, is down 20% since joining the Dow Jones Industrial Average five years ago.
What happened? ChatGPT. The explosive arrival of AI has created huge demand for compute, which requires not just tons of Nvidia and Google chips, but also high bandwidth memory to operate alongside. At the same time, companies like Klarna have been using AI to consolidate and replace software providers like Salesforce.
There is also another concern: that companies will add fewer employees because of AI, or need fewer workers signed up for each platform--and software companies typically charge "per seat."
CEOs like Bill McDermott of ServiceNow and Aaron Levie of Box insist that AI will create more software usage in the long run. But ServiceNow shares slumped on their results earlier this week, and are down 42% over the past year. Box is down 24%. Atlassian is down 61%. Even Germany's software giant SAP plunged 16% this week after reporting results.
All told, the IGV software ETF is down 16% this month, while storage and memory names are having their best month ever. "Hardware is the place to be, it's not software anymore," G Squared's Victoria Greene told us last Friday. "All of these components are in short supply and go into everything," she said, a point echoed by analysts like C.J. Muse, and Western Digital CEO Irving Tan, who told our show yesterday that he expects high memory demand to persist for years.
In the meantime, the panic out of software is starting to interest longer-term value-oriented investors, like DCLA's Sarat Sethi, who told us on Friday he's starting to buy names like Workday. "These companies are trading at 13 or 14 times cash flows, versus 22 or 23 times historically, and still growing eight to ten percent," he said.
The real question to me is what happens with private equity, which is overexposed to software. Some executives, like Orlando Bravo of Thoma Bravo, are doubling down--the firm even raised $24 billion to buy more software names, according to the FT. But if the industry doesn't snap back quickly, select firms and their clients (like pension plans and college endowments) could see sizeable losses.
Three-plus years after ChatGPT first launched, the pressure is intensifying on the software space, and all of those who are exposed to it.
See you on Monday!
Kelly