Snowflake just showed that AI can help a software company grow instead of hurting it. The stock jumped after the company reported better-than-expected earnings and announced a $6 billion deal to use Amazon’s processors for its AI products. This is an impressive achievement, but it is only one example in a sector that investors still mostly avoid in favor of hardware. Here’s why Snowflake’s success is important, and why it does not mean the whole sector is recovering.
Snowflake, which focuses on data warehousing, made a strong case that AI is increasing demand for its products instead of putting them at risk. This has been a tough point for software companies to prove. For example, Salesforce and Zscaler both had disappointing results, even after making several AI-focused acquisitions. The big swings in their stock prices after earnings show that investors still do not have a clear way to value software companies in the age of AI.
The difference between software and hardware is clear. So far this year, the 20 best-performing S&P 500 stocks are all hardware or infrastructure companies. The top software company, Datadog, is only in 24th place. Snowflake’s recent gains are real, but they are much smaller than the returns seen by memory chip makers and companies focused on AI infrastructure.
The reason is straightforward. When capital expenditure on AI infrastructure runs into the hundreds of billions of dollars annually, the companies selling the picks and shovels, chips, memory, and power systems generate visible, immediate revenue growth. Software companies face a harder question: how much of the AI buildout translates into incremental spending on their products, rather than displacement by AI-native alternatives.
This question will be answered over time. The hardware boom will slow down, and it will become easier to see which software companies are long-term winners. However, with companies like OpenAI and Anthropic still private and launching new products quickly, investors are not yet ready to put a lot of faith in established software companies.
A single strong quarter from Snowflake does not mean the tough times for software companies are over.
