Market professionals are increasingly of the view that the selloff in software stocks over the past few weeks has been excessive, creating new buying opportunities in stocks whose prices have plunged amid the wave of overselling. In a note to clients on Tuesday, strategists at JPMorgan wrote that the software sector has the potential for a rebound, citing “overly pessimistic expectations regarding the disruptive changes from AI and robust fundamentals.” Meanwhile, Goldman Sachs CEO David Solomon said Tuesday he believes the selloff has been “overly broad.”
“It’s almost as if people think software prices are going straight to zero right now,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. “That kind of one-sided trade is so obvious that a rebound could actually emerge.”
These stocks are currently at historical lows. The forward price-to-earnings ratio of the S&P North American Software Index fell below 20 times for the first time last week. It is now around 23 times, having rebounded somewhat, but remains well below its long-term average of 34 times.
Jefferies studied the 64 software stocks it covers and found that “42% of the stocks are trading at or near their historical low valuations,” analysts led by Brent Thill wrote in a note to clients on Sunday.
“I think we’re on the cusp of a very strong rebound in software stocks,” said Michael Toomey of Jefferies’ equity trading department. BTIG’s technical traders echoed similar views, writing in a report last week that software stocks “are at a breaking point and should find a tactical bottom here.”
The rebound appears to have already begun. A closely watched ETF tracking the software industry fell for eight consecutive trading days from January 26 to February 4, dropping 15%, but has since rallied 7.2%. According to Vanda Research, retail buying in this ETF was “record-breaking,” which Vanda Research described as “one of the most aggressive instances of retail dip-buying in tech, particularly software stocks, observed in our dataset.”
While uncertainties hanging over the sector are real, the selloff has been so severe that even many companies expected to be long-term winners have not been spared. Companies most frequently mentioned by market experts include: Microsoft (MSFT.US), Snowflake (SNOW.US), ServiceNow (NOW.US), Salesforce (CRM.US), and Palantir Technologies (PLTR.US).
Data analytics software company Snowflake saw its stock price decline 27% in just six trading sessions from January 29 to February 5. However, the company occupies a favorable position in the AI ecosystem. Last week, Snowflake signed a multi-year collaboration agreement worth $200 million with OpenAI, following a similar deal with Anthropic PBC in December. Thill wrote in a note to clients on February 5 that Snowflake is “one of the most obvious AI beneficiaries in all of public software.” Institutions including UBS, Loop Capital, Wedbush, Bank of America, and DA Davidson have also given Snowflake high praise.
Michael Mullaney, director of global market research at Boston Partners, noted the weakness in Salesforce, ServiceNow, and Workday Inc. (WDAY.US). He said if he focused on growth stocks rather than value stocks, he would be buying these names on weakness.
Datadog (DDOG.US) was also mentioned. The company’s shares surged 14% on Tuesday, marking their biggest gain since November, following strong results and better-than-expected revenue guidance.
