Yahoo Finance Live’s Brian Sozzi gives his perspective on software stock performance.
Video transcript
– Software stocks are hitting a snag amid demand concerns as inflation and recession fears remain, but what does that mean for investors looking at this industry? That’s where we see today’s take from Mr. Sozzi.
– Let me tell you what it means for me, it’s a lot of busy weeks because you have a lot of investor conferences coming up. Deutsche Bank, I think, had software conferences. Jefferies had a conference. You have a Goldman tech conference next week. And this against all against a backdrop of software stocks that are under intense pressure. They have been hammered.
And you look at the core ETF software, that is, the iShares expanded tech software ETF has really cratered since early August, has really underperformed the broader market, which of course, is not very good on its own. But, nevertheless, software stocks are selling again here.
They rallied back a bit. But, again, that sell-off continued. And some of the worst performers in this group are Adobe, Salesforce, Intuit, and ServiceNow. Adobe, I believe, is reporting earnings later this week. I think the Street is concerned about what that guidance might look like, especially after what Okta reported last week, the concerns about the pace of business spending, the guidance isn’t very good.
Salesforce is under pressure. Intuit, I was surprised to see it on this list because they had a good quarter a few weeks ago. And then ServiceNow also had a good quarter, but expressed some concern a few weeks ago when they reported on the pace of enterprise spending going forward.
So I’m looking at some notes here from Jefferies analyst, Brent Thill, who did a deep dive into software stocks after their conference. And trying to call what could lead to a rebound in some of these stocks, but he is also the first to call that this pain, the sell-off can continue. “The storm is coming and it’s going to be fiercer than we all think. The industry is seeing that things have changed, mostly on the macroeconomic front.” That’s what Phil thinks is causing this sale.
But some things here could lead to a bounce in some of these stocks. Again, first, we have Wall Street meeting season, many of these companies will be presenting in the coming weeks and months. Valuations have dropped dramatically. In some cases, many of these names are trading below, well below peak valuations and expectations have fallen sharply. Long-term investors will have to re-emerge in the space for these stocks to get a bid, according to Phil.
So is the return of M&A. I think a lot of these valuations have come down a lot, you might see some consolidation. Is Salesforce hungry to make its next big acquisition after it ate up Slack from a few years ago? And then last but not least, Phil’s good point here, you want to see the unwinding of the recession trade. So many people piled into these trades in the safe haven of a recession. Need to unwind a bit and, perhaps, that money goes to beat software stocks. But, in the end, my take is this, just wait for this trade to come to you. There is absolutely no point now in trying to be a hero or, as they say, to catch a falling knife. Wait for this trade to come to you, wait for these stocks to perform better.
– And you with piles of money.
– I have a pile of money because I waited for the trade.
– Oh, so you’ve been rewarded handsomely. Everything is correct.