①Morningstar analysts recently stated that concerns surrounding the software industry have been excessively magnified, and this wave of disorderly sell-offs presents an excellent opportunity to buy at a lower price; ②He specifically highlighted two stocks that have suffered significant declines in share prices, stating that they possess "substantial upside potential": Microsoft and the U.S. cloud software company ServiceNow.
Cailian Press, February 8 (edited by Bian Chun) – Last week, the outlook for U.S. software stocks turned bleak as investors increasingly believed that Anthropic’s AI assistant, Claude, could render the entire software industry or even IT departments irrelevant.
The software sector took a sharp downturn, with the iShares Expanded Tech-Software Sector ETF (IGV) falling 19% between January 26 and February 5. From last Tuesday to Thursday, the Nasdaq index fell more than 1% for three consecutive days due to the drag from the software sector.
However, analysts at Morningstar Inc., one of the world's leading independent investment research firms, recently stated that these concerns have been overblown, and this chaotic wave of sell-offs presents an excellent opportunity to buy low.
“We see little evidence that the bearish logic is materializing – customer retention rates and other core software metrics remain robust. In short, while we acknowledge the risks, we believe market concerns are excessive,” said Dan Romanoff, senior equity analyst at Morningstar.
“We do not believe corporate software clients will shift to developing internal solutions on a large scale, thereby posing a significant threat to the business models of existing software providers,” Romanoff said. He noted that the number of user accounts purchased might face some pressure, but there is currently no evidence that this is occurring, and automation is not exactly a new trend.
On Friday, U.S. software stocks rebounded significantly, with IGV rising more than 3% and the Nasdaq index climbing over 2%.
Due to the intensity of the sell-off, Romanoff indicated that investment opportunities still exist across the entire software industry. He specifically highlighted two severely battered stocks, describing them as having 'significant room for growth'. $Microsoft (MSFT.US)$ and the U.S. cloud software company $ServiceNow (NOW.US)$ 。
Year-to-date, Microsoft and ServiceNow’s stock prices have fallen by 17% and 35%, respectively.
Romanoff gave a “fair value estimate” of $600 for Microsoft’s stock, suggesting the potential for a 50% increase. For ServiceNow’s stock, he estimated a fair value of $200, implying a potential price increase of up to 100%.
However, he still issued a warning about the volatility of the software sector, stating that 'the current market conditions in the software sector are not suitable for investors with low risk tolerance.'
Despite market concerns that AI will 'consume' the entire software industry, Romanoff believes investors have overestimated the actual impact of this new technology. He pointed out that several companies have publicly expressed a cautious stance toward AI at this stage.
"Despite the ongoing hype, AI products have not generated significant revenue for software providers, as management teams are generally concerned about issues such as AI hallucinations and uncontrollable agents." Romanoff stated, "Data disclosed by publicly listed software companies also confirm this: revenue from AI solutions typically accounts for only about 2% of total revenue. Additionally, OpenAI's revenue structure further supports this observation, as its income heavily relies on consumer subscriptions."
Editor/Rocky
