Rick Sherlund, founder of AI software investment bank Sherlund Partners, believes the market is on the verge of a significant upswing despite recent pullbacks in tech stocks.
In an interview with CNBC, Sherlund argued that while investors are fixated on rising capital expenditure at major tech companies, the underlying demand for AI infrastructure makes these investments essential rather than excessive.
The recent earnings reports from Alphabet (GOOGL), (GOOG) and Microsoft (MSFT) have sparked concerns about a potential bubble, with Alphabet forecasting capital expenditures between $175B and $185B this year—potentially more than double its 2025 spending.
However, Sherlund dismisses these worries, noting that the real issue isn’t whether demand will materialize. “The demand is there. The concern is capacity,” he said.
According to Sherlund, the key to understanding the current market dynamics lies in the shift from consumer-focused AI applications to enterprise adoption. As businesses deploy AI agents and reasoning-intensive applications, the need for inference computing has exploded.
“Inference is really just starting to take off,” Sherlund explained, adding that enterprise use of reasoning models “burns a lot of cycles.”
The broader software sector, meanwhile, is experiencing what Sherlund describes as a predictable disruption.
“The software sector, every 10, 15 years, goes through a forest fire,” he noted, pointing to previous platform shifts that saw companies like PeopleSoft replaced by Workday (WDAY) and Siebel Systems overtaken by Salesforce (CRM). The current transition from traditional SaaS to AI-native platforms is creating similar uncertainty among investors.
Sherlund cautioned against oversimplifying the threat to established software companies, particularly those with complex enterprise workflows.
While “vibe coding” may make simple applications easier to replace, companies like SAP (SAP) with “extensive integrations and supply chains” have a much larger moat protecting their business.
“The coding itself is maybe 20% of what a software company has to do,” he said.
Looking ahead, Sherlund expects AI-native companies to begin going public later this year as they seek capital to build out data center capacity. While this may create a challenging narrative for legacy software vendors, Sherlund remains optimistic about the overall direction of the market as enterprises increasingly leverage large language model technology.
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