Battered software stocks to rebound?

Scanning the Financial Times recently, one particular quote stood out:

“The software sector,” warned Christian Hoffman of Thornburg Investment “is facing an existential crisis right now.”

“Both private credit and software,” he added, “are facing significant pullbacks.”[1]

Indeed. Deep corrections are noted in many famous IT/analytics stocks, such as SAP, RELX, Salesforce, Moody’s, Microsoft and Adobe. A wide swathe of companies are being hammered relentlessly.

This bout of ‘creative destruction’ is wrecking investment portfolios.

But then, I remember Buffett’s immortal quote: Be greedy when others are fearful. Are these intense ‘indiscriminate selling’ wildly overdone?

So the first question I ask is this: Will all these software companies go bust? I suspect not.

Many are using state-of-the-art AI tools in their businesses. They will continue to sell proprietary tools and analytic insights.

The second question: Will AI hit every company with the same impact? Again, I suspect not.

The evolving AI will change different sectors differently. Some will adapt and prosper; some will, inevitably, shrink.

The key is re-allocating capital to those companies that are using AI to improve their underlying businesses (that is, AI-induced productivity gain).

Since 2009, when the current bull market started, we have been witnessing a series of ‘rolling boom-bust’ sequences. Netflix, Tesla, Applovin, Palantir, for example, all experienced sharp rallies and decline at some point during the 17-year bull run.

The software sector’s recent decline is no different.

An oversold rebound may happen in the near term. Look at the iShares Software ETF (IGV). Prices have declined near its previous reaction low, where short-term buyers may enter to force a rebound.

At this point, perhaps investors should play to their edge. If a company’s stock decline is grossly overdone (than justified by its fundamentals), use the recent price decline to stack up. Knowing the backdrop of a company helps enormously.

If a company is underperforming the market and sector persistently, moving on may be the best tactic.

[1] https://www.ft.com/content/2c373617-123b-4c10-9acd-6ea929887a8a (paywall)