Software stocks surged this week while semiconductor stocks fell, as investors bet that AI demand is converting into real, long-term revenue contracts rather than temporary usage spikes. Cloud infrastructure company DigitalOcean pre-announced remaining performance obligations exceeding $800M—more than 10x year-over-year—driven by new nine-figure AI inference contracts with average lifespans stretching over three years, providing evidence that AI spending is durable and contracted rather than volatile.
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The iShares software ETF (IGV) climbed roughly 7% over eight sessions while the semiconductor index SOXX fell ~8.5%, as investors rotated from high-flying semiconductors into beaten-down software stocks. DigitalOcean pre-announced remaining performance obligations (RPO) exceeding $800M, more than 10x year-over-year, driven by multiple new nine-figure AI inference contracts. PagerDuty and Paylocity each rose 4.1%.
Why it matters
DigitalOcean's results provide evidence that AI spending is converting into durable, contracted backlog rather than volatile usage demand. The company guided revenue growth to accelerate to ~29% (from a prior 24–25% guide) and margins to the high end. This signals to investors that AI-driven software revenue may be becoming predictable and sustainable, making the sector more attractive after a period of skepticism about AI monetization.
What to watch
DigitalOcean's average AI contract life has stretched from 1.6 to over three years, suggesting longer customer commitments. Microsoft rose ~3% on the week after launching its $2.5B "Frontier" AI-services unit. ServiceNow and Salesforce each gained around +4% as part of the broader rotation into software.
The software sector rotation reflects a shift in how investors evaluate AI's business impact. After a period of AI-disruption skepticism that pushed valuations lower, DigitalOcean's pre-announcement of more than 10x year-over-year remaining performance obligations provides concrete evidence that AI infrastructure spending is materializing as multi-year contracts rather than ephemeral demand. The fact that average contract life has extended from 1.6 to over three years suggests enterprise customers are making sustained, strategic commitments to AI inference workloads rather than experimenting with short-term pilots.
This rotation occurs in the context of broader market skepticism about near-term AI monetization. Guggenheim analyst John DiFucci's recent upgrades of Salesforce and ServiceNow to Buy were explicitly framed as valuation calls rather than AI endorsements—he noted that the darkest scenario for the sector was already priced in and that near-term AI monetization was unlikely to materialize. DigitalOcean's results appear to test that pessimism: if AI demand is already landing as nine-figure, multi-year contracts, the case for a valuation floor in software stocks strengthens, even if near-term profit acceleration remains uncertain.
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