Preview of Citibank Q2 software industry financial report: AI budget will concentrate on "data infrastructure leaders", these US stocks will emerge as winners.

As the second quarter earnings season of U.S. stocks is about to kick off, Citigroup Inc. pointed out in its latest software industry outlook report that IT spending has shown improvement compared to the previous quarter, but budgets related to enterprise AI are highly concentrated on a few platform-type companies with data infrastructure and AI empowerment capabilities. Citigroup has listed MongoDB (MDB.US), Snowflake (SNOW.US), and Palantir (PLTR.US) as its top picks in the software sector, while expressing optimism towards Microsoft Corporation (MSFT.US) in the mega-scale and AI infrastructure space, and favoring Figma (FIG.US) and Shopify (SHOP.US) in the application software sector. Citigroup stated in the report, "We believe that these companies are still among the most capable of seizing the opportunity for growth in enterprise AI spending, while many areas of software continue to face increasing competitive pressure, and the long-term viability of business models continues to be questioned." Improvement in IT spending but "extremely uneven distribution" Citigroup found in its latest CIO survey that after a weak first quarter, technology spending has improved in the second quarter, with progress made on some postponed projects. Citigroup believes that some of the improvement may reflect the continued growth in AI-related spending, and comments from partners indicate that some deals deferred earlier in the year may be completed in the second quarter. Based on a survey of hundreds of IT decision-makers, Citigroup found that global IT budget growth is accelerating, with an expected increase of 3.3% in the next year. Data analytics and AI have surpassed cybersecurity as the top investments, with about 6.5% of IT budgets specifically allocated to the AI domain. However, Citigroup did not find signs of a balanced distribution of spending improvements in the software sector. "Increased budget funds are still disproportionately flowing towards AI infrastructure, cloud platforms, and data modernization projects." This means that the "K-shaped" differentiation in the software industry is deepening top players with data infrastructure capabilities continue to attract funding, while traditional application software faces increasingly tough competition and questioning of business models. Citigroup's analysis points out that AI budgets are gradually being integrated into platforms that can demonstrate quantifiable investment returns, rather than being widely scattered across the entire software sector. This trend means that only companies in favorable positions in cloud-native and AI-ready architecture transformation can truly benefit from the growth in enterprise AI spending. Three top picks: the intersection of data infrastructure and AI MongoDB (MDB.US): Atlas cloud platform continues to expand, AI retrieval capabilities implemented Citigroup noted that MongoDB, as a NoSQL database company, is benefiting from the major trend of enterprises migrating data to the cloud. Its fully managed Atlas cloud platform continues to be favored by customers, especially as companies move from traditional database systems to cloud-native and AI-ready architectures. MongoDB has recently released several AI-related features, including the Voyage Context 4 retrieval function and the Atlas native re-ranking function, aimed at helping companies improve AI retrieval quality, simplify AI operations, and reduce inference costs. Citigroup expects that the demand growth for AI applications and vector search tools will continue to support the company's growth. Citigroup maintains a "buy" rating on MongoDB with a target price of $455. Snowflake (SNOW.US): Double drivers of AI Data Cloud and Cortex platform Citigroup also lists Snowflake as a top pick, optimistic about its prospects for benefiting from the growth in AI-related data consumption with its AI Data Cloud and Cortex computational layer. Citigroup categorizes Snowflake into the cloud and data infrastructure category that is experiencing real spending acceleration, distinguishing it from commoditized application software facing integration and return on investment scrutiny. Snowflake recently obtained the French HDS medical data certification, and its Intelligence product has been fully launched. Citigroup maintains a "buy" rating on Snowflake with a target price of $320. Palantir (PLTR.US): Positioning as a key moat in the AI orchestration layer Citigroup has listed Palantir as a top pick ahead of the earnings season, emphasizing its unique position in data infrastructure and AI empowerment. As AI budgets concentrate on platforms that can demonstrate measurable return on investment, Palantir is in a favorable position. Palantir recently announced a partnership with Rackspace Technology to deploy its AI platform in regulated and sovereign environments. CEO Alex Karp has sharply criticized the Token valuation model of OpenAI and Anthropic, stating that the model has "major flaws." Citigroup maintains a "buy" rating on Palantir with a target price of $225. Other favorable targets: Microsoft Corporation, Figma, and Shopify In the mega-scale and AI infrastructure provider space, Citigroup holds a positive view on Microsoft Corporation (MSFT.US). Microsoft Corporation recently announced a $25 billion investment to establish an independent operating entity, Microsoft Frontier Company, with a team of about 6,000 people aimed at helping enterprise customers deploy AI. Citigroup maintains a "buy" rating on Microsoft Corporation with a target price of $620. In the application software sector, Citigroup is optimistic about Figma (FIG.US) and Shopify (SHOP.US). Figma recently acquired the core team of the AI programming and intelligent agent platform Bud to enhance its AI capabilities. Citigroup maintains a "buy" rating on Figma with a target price of $36. Shopify received an upgrade to "buy" from Stifel and is viewed by BofA as a "core beneficiary of AI-driven commerce." Citigroup maintains a "buy" rating on Shopify with a target price of $156. The least favorable targets for Citigroup: ZoomInfo and Adobe Ahead of the second quarter earnings announcements, Citigroup's least favorite companies include ZoomInfo (GTM.US) and Adobe (ADBE.US). Citigroup stated, "We expect execution risks to rise, and short-term booking growth to slow down. Both companies significantly lowered their performance expectations for the previous quarter. In addition, Adobe is currently in a CEO/CFO transition period, while ZoomInfo announced a 20% workforce reduction in the first quarter." ZoomInfo lowered its full-year revenue guidance by about $62 million in May and announced a 20% workforce reduction. Despite the recent release of the AI sales tools benchmarking system GTM Bench, Citigroup remains cautious about the short-term outlook. Adobe reported a 12.7% year-on-year revenue growth in the second quarter, but its stock price has still declined by about 37% since the beginning of the year. The continued deepening of the "K-shaped differentiation" in the software industry Citigroup's report reveals a clear industry trend: enterprise AI spending is undergoing a "quality migration" new budget allocations are no longer evenly distributed but are concentrated on data infrastructure platforms that can demonstrate clear investment returns. For investors, the upcoming second quarter earnings season will be a critical test. Citigroup believes that companies at the intersection of data infrastructure and AI (MongoDB, Snowflake, Palantir) are still in the most favorable competitive positions; while traditional application software companies (such as ZoomInfo, Adobe) face multiple challenges of execution risks, slowing booking growth, and business model transformation. As Citigroup stated in the report, "Many areas of software continue to face increasing competitive pressure, and the long-term viability of business models continues to be questioned." In the current environment where AI is reshaping the software industry, those who can become the "inevitable path" for enterprise AI spending will emerge as winners in the first half of the K-shaped differentiation. At a more macro level, Citigroup has raised its forecast for total AI industry revenue from $2.8 trillion to $3.3 trillion for 2026-2030, and its capital expenditure forecast from $8.0 trillion to $8.9 trillion during the same period. Citigroup's analysis suggests that when "growth no longer shows fluctuations" becomes the mainstream trend in the industry, and by 2026, generative AI and intelligent agents will transition from mere "concept speculation" to a "strategic necessity" for enterprises, the entire software industry will have the foundation for a second acceleration in development. However, Citigroup also warns that many areas of software continue to face increasingly fierce competitive pressures, and the long-term viability of business models continues to be questioned. Even winners in the software sector need to continuously demonstrate quantifiable AI investment returns to remain competitive in the trend of budget consolidation.