For many years, software businesses commanded premium valuations. High margins, recurring revenues, and scalable business models justified those multiples. The economics were attractive: build the product once, distribute it globally, and grow without the burden of factories, inventory, or significant physical infrastructure.
That model is now evolving under the influence of artificial intelligence.
Scaling AI now requires enormous physical infrastructure. Data centres the size of small towns, advanced cooling systems, and energy demands that can strain national grids are becoming essential. These are no longer purely software businesses. Increasingly, they resemble capital-intensive infrastructure companies with software layered on top.
Companies are expected to spend around $800 billion on AI infrastructure in 2026, rising to $1.1 trillion next year, with total spending potentially reaching $7–8 trillion by 2031.
Investors are beginning to recognise that AI may fundamentally alter the economics of software. The emergence of enterprise AI tools has created growing concerns around what some have termed a “SaaSpocalypse” — the fear that software products may become easier to replicate, less differentiated, and more vulnerable to disruption.
Against this backdrop, we believe it is more important than ever to own businesses that possess durable competitive advantages and the ability to adapt over time. We continue to favour companies that:
- Sit at the centre of critical workflows
- Integrate deeply across customer ecosystems
- Own proprietary data that compounds in value over time
- Operate within regulated or mission-critical environments
- Control difficult-to-replicate infrastructure
- Learn and adapt quickly
- Successfully use AI to lower costs and improve productivity
- Maintain close relationships with customers rather than chasing trends
- Empower decentralised decision-making and innovation
- Invest early in structural change rather than react late
- Generate durable cash flows with pricing power
- Evolve without compromising the strength of the core business
In our view, the long-term winners in AI will not necessarily be those generating the most excitement today but those capable of adapting, enduring, and compounding over many years.
Warren Buffett once observed, “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own.”
It is a timely reminder for today’s market environment.
Artificial intelligence is a genuine technological breakthrough with the potential to improve productivity and reshape the global economy meaningfully. Comparisons to railroads, electricity, automobiles, computers and the internet are justified. Our concern is not with AI itself, but with the growing disconnect between how rapidly AI-related assets depreciate and how aggressively they are currently being financed.
History shows that transformative technologies create enormous societal value, but not always shareholder value. The automobile transformed modern life, yet only a handful of manufacturers survived. Radio and aviation captured investors’ imagination during the 1920s, but after the crash, much of that capital was permanently destroyed.
The recurring mistake is confusing technological innovation with a sustainable business model.
When uncertainty begins to feel exciting rather than dangerous, capital tends to flood into markets indiscriminately. That is often when risks become most underappreciated.
The most expensive words in investing remain, “This time it’s different.”
Infrastructure booms often create poor long-term returns for investors despite changing society dramatically.
Our philosophy remains unchanged. We continue to advocate for long-term investing rather than attempting to predict short-term market movements. History consistently shows that missing the market’s strongest days has often been more damaging to long-term returns than successfully avoiding periods of weakness.
Patience, discipline, and rational decision-making remain among the most valuable advantages an investor can possess.
Awet Ghirmay, Head of Investment Research
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More information about our fund can be found here: Hargreaves Lansdown or AJ Bell.
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
