During the first quarter of 2026, investors worried that AI would erode the competitive moats of established software companies, that hyperscaler spending was unsustainable, and that valuations were stretched. The uncertainty about AI and the corresponding rotation out of tech stocks during the latter half of 2025 and the first quarter of 2026 had a material impact on relative valuations.
Despite the market’s disappointing first quarter returns for several foundational technology companies, earnings continued to move higher. These companies’ stock prices had moved sideways and down since last summer despite the persistent drive upward of earnings. As discussed in our latest Runway Investment Letter, “the ‘gap’ between the blue and green (see figure below) represents the significant returns we believe we are ‘owed.’”
We heard the concerns surrounding AI disruption but disagreed with much of that narrative. The companies we own are not passive bystanders to AI disruption — they are active participants and beneficiaries. We believe these businesses are net AI beneficiaries that are currently being valued as net losers.
Investors are selling software companies due to AI fears which we believe are largely exaggerated. Businesses that offer industry-specific solutions and companies embedded in the way people conduct business continue to benefit from substantial data, compliance capabilities, customer relationships, and decades of expertise. We believe the continued advancements of AI models and new use cases grow their total addressable markets and enhance their growth trajectories.
At the same time, investors are also lightening up on shares of companies investing heavily to support the AI buildout. Alphabet, Amazon.com, and Meta Platforms all described how larger scale investments are the direct result of higher than anticipated demand. Management teams continue to generate substantial revenue and ROI from these investments while repeatedly stating that demand for their products will continue to exceed supply in the short to medium-term.
We believe AI will continue to drive durable earnings growth and investors will return to buy these names as their earnings power grinds higher. Their growth opportunities remain intact.
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