Technology Sector Out of Balance: Infrastructure Grows, Software Struggles

• Marius Wennersten
  Portfolio Manager
  DNB Fund Technology

While cloud infrastructure and AI-related services are gaining significant momentum, the traditional SaaS segment is coming under increasing pressure. This structural divergence is not a temporary market phenomenon – it reflects fundamental shifts in the way companies deploy and finance technology. For selective investors, this creates concrete opportunities.

On the infrastructure side, hyperscaler investments are driving accelerated cloud growth. AWS has increased its year-over-year growth from 12% to 24%, Azure from 32% to 39%, and Google Cloud from 22% to 48%. EBIT margins remain stable despite a decline in free cash flow margins, supported by customer retention and economies of scale. AI agents are driving a sharp increase in revenue growth at innovative labs, with both Anthropic and OpenAI more than doubling their revenue run rates in recent months. We expect many companies to source their compute for agentic AI through established cloud platforms (AWS, Azure, GCP), allowing hyperscalers to benefit from rising utilisation while retaining the flexibility to reallocate capacity to other cloud services should AI spending slow. We view the risk/reward profile at the hyperscaler level as attractive.

On the software side, the Morgan Stanley SaaS Basket has fallen 34% over the past twelve months, while the NASDAQ has risen 22%. We believe this partly reflects real headwinds – bundling, disintermediation, lower switching costs and evolving business roles – but also overstated concerns around DIY software and vibe coding. Broader software platforms are more resilient to these risks, and some of those with sound business, engineering or technical logic are, in our view, better insulated than current valuations suggest. The price action creates opportunities in selected names where we see an attractive risk/reward profile.

We remain constructive on the technology sector. Over time, the relative outperformance of this asset class has been driven by above-average earnings growth, reflecting the central role of technology in driving productivity across the global economy. We view agentic AI as the next stage of this productivity cycle. At the same time, the valuation dispersion within the technology sector is wide, which is why our approach is optimistic but disciplined. We focus on companies where long-term earnings power and cash generation appear undervalued, and avoid areas where expectations and valuations look excessively elevated.

Looking ahead, we see the key growth drivers as the broader adoption of AI across the economy, productivity gains from software and automation, and the continued digitalisation of payments and business processes. The main challenges include elevated expectations in parts of the AI value chain, policy uncertainty, and the risk of overcapacity building in selected hardware segments.