'The storm is coming' for software stocks, analyst says
Yahoo Finance Live’s Brian Sozzi provides his take on software stock performance.
Video Transcript
- Software stocks hitting a snag amid demand concerns as inflation and recession fears linger, but what does this mean for investors who are looking at this industry? That's where we find 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 believe, just had a software conferences. Jefferies had a conference. You have the Goldman tech conference next week. And this comes against all against a backdrop of software stocks that have been under severe pressure. They've been hammered.
And you look at the main software ETF, that is the iShares expanded tech software ETF has really cratered since the early part of August, has really underperformed the broader market, which of course, hasn't done too well on its own. But, still, software stocks again selling off here.
They had rallied back a bit. But, again, that sell-off has resumed. And some of the worst performers in this group are Adobe, Salesforce, Intuit, and ServiceNow. Adobe, I believe, reports earnings later this week. I think the Street is concerned what that guidance might look like, especially after what Okta reported last week, concerns about the pace of enterprise spending, guidance not too good.
Salesforce has been under pressure. Intuit, I'm surprised to see it on this list because they actually had a pretty good quarter a couple of weeks ago. And then ServiceNow also a pretty good quarter, but did voice some concern several weeks ago when they reported about the pace of enterprise spending moving 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 out what might lead to a rebound in some of these stocks, but he also is first calling out that this pain, the sell-off could continue. "The storm is coming and will be more fierce than we all think. The industry is seeing that things have changed, mostly on the macroeconomic front." That is what Phil thinks is causing this sell off.
But a couple of things here what might lead to a bounce in some of these stocks. Again, first, we have conference season picking up on Wall Street, a lot of these companies are going to be presenting in the weeks and months ahead. Valuations have come down a lot. In some cases, a lot of these names are trading below, well below peak valuations and expectations have come down a lot. Long term investors have to reemerge in the space for these stocks to catch a bid, according to Phil.
Also the return of M&A. I think a lot of these valuations have come down so much, you might see some consolidation. Does Salesforce get hungry to make its next big acquisition after it is devoured Slack from a couple of years ago? And then last but not least, good point by Phil here, you want to see the unwinding of the recession trade. So a lot of people have piled into these recession safe haven trades. That has to unwind a little bit and, perhaps, that cash goes into beat up software stocks. But, ultimately, my take is this, just wait for this trade to come with you. There's really no point right now in trying to be a hero or, as they would say, to catch a falling knife. Wait for this trade to come to you, wait for these stocks to act better.
- And you with a pile of cash.
- Me with a pile of cash because I waited for the trade.
- Oh, so you were rewarded handsomely. All right.
