The latest Research Reports from Bank of America show that the Software Sector has cumulatively declined by 18% since February 18, with a drop smaller than the historical average of 27% over the past 15 corrections. The current industry EV/Sales (NTM) is 5.5 times, significantly lower than the historical bottom average of 6 times, indicating that valuations have entered an attractive Range. It is noteworthy that the market pricing for the industry’s growth premium is only 27%, which is a significant discount compared to the average of 44% during the last seven recession lows, reflecting excessive pessimism among investors regarding future growth.

Despite uncertainties in the macro economy, demand signals in the software industry remain robust. In the two most cyclical software fields, cloud and desktop, data from February shows sustained strong demand. The participation visit volume of cloud service providers increased by 8.0% year-on-year, an improvement from January's 6.6%; in the desktop application field, participation visit volume in February increased by 5.3% year-on-year, significantly higher than January's -1.3%. This data indicates that software industry demand has not been significantly impacted by potential macroeconomic risks.

Bank of America Securities also evaluated the growth expectations for the software industry. By analyzing Historical Data and current market conditions, it believes the growth expectations for the software industry in 2025 are fundamentally reasonable. Based on a recent upward consensus estimate of 1.8%, the revenue growth target for the first and second quarters of 2025 is expected to be 13.4% year-on-year, which, despite a slowdown compared to the reported data of 14.2% in the fourth quarter, remains achievable under a relatively loose comparison base.

Recession Cycle Insight: Significant Characteristics of Lagged Response and Profit Resilience.

During the economic recession's cold wave, the software industry has showcased a unique resilience, becoming a warm current within the economic system. The significant recession triggered by the 2008 global financial crisis provides a vivid example of the lag in adjustments to corporate IT budgets. It is only after 2-3 quarters following the onset of recession that companies begin to adjust their IT budgets, and this lag provides a buffer period for the software industry. The revenue growth rate for front-end applications only fell from 43% to 36% in the third quarter following the start of the recession, demonstrating the strong resilience of the software industry's business model during economic downturns.

The operation profit margin of the Software industry expanded counter-cyclically during economic recessions, becoming a key aspect of its unique resilience. During the 2008 Great Recession, front-end software's operation profit margin increased by 300 basis points, back-end software by 200 basis points, and infrastructure software by 150 basis points.

This increase in profit margins is primarily attributed to the rising proportion of renewals in the software sales model, which brought about a significant sales expense leverage effect. During economic downturns, customers are more inclined to maintain their existing software services rather than make large-scale cuts, allowing software vendors to stabilize revenues through renewals while reducing costs associated with acquiring new customers.

This unique resilience is not only reflected in the financial data of the software industry but also in its ability to adapt to economic fluctuations. The business model of the software industry enables it to maintain relatively stable development during economic recessions, providing investors with a certain degree of risk-hedging value.

The formation of this model is closely related to the high fixed costs and low marginal costs characteristic of the Software industry. The development of software products requires a significant amount of upfront investment, but once developed, the costs of copying and distribution are extremely low, allowing software vendors to share costs and increase profits as their user base expands.

Furthermore, historical data shows that the software industry has performed remarkably well in the market following economic recessions, exhibiting a strong pattern of excess returns. Within a year after the market bottomed in March 2009, the average return on software stocks reached an impressive 113%, outperforming the Nasdaq Index by 56 percentage points. This outstanding performance highlights the robust momentum and immense potential of the software industry during the early stages of economic recovery. In the same period after the 2002 tech bubble burst, the excess returns of the software industry also reached 29 percentage points, further validating its rebound capability after market lows.

Currently, the valuation indicators of the software sector show an attractive margin of safety for long-term investors. The sector's EV/free cash flow multiple is 31 times, which is 10 standard deviations lower than the historical median over the past 5 years. This valuation level indicates that the current pricing in the software industry is relatively conservative, providing a substantial safety cushion for long-term investments. In this scenario, investors have the opportunity to enter the software sector at a relatively low risk level and share in the benefits of the industry's growth.

Integrating historical patterns with current valuation conditions, the software industry demonstrates unique investment value across different stages of the economic cycle. Whether it's the strong rebound after a recession or the currently attractive valuation levels, both present opportunities for investors to position themselves in this industry. In the future, as technology continues to innovate and market demands evolve, the software industry is expected to maintain its distinctive risk resilience and growth potential, delivering substantial returns for investors.

Structural Risks: Tariff shocks and waves of layoffs hide complexities.

In the current complex economic environment, the Software industry is facing concentrated impacts from direct risks, with the e-commerce software sector being particularly affected.$Shopify (SHOP.US)$、$Global-E Online (GLBE.US)$、$BigCommerce Holdings (BIGC.US)$Purely online platforms are completely reliant on digital business demand, thus being 100% exposed to the fluctuations of cross-border trade.

$Lightspeed POS (LSPD.US)$There is also 63% of revenue related to the Retail Trade, which is similarly affected by changes in trade policies. In addition,$Salesforce (CRM.US)$the e-commerce cloud revenue accounts for 7%, and is also impacted to some extent by market fluctuations.

The marketing technology sector is also under pressure.$Zeta Global (ZETA.US)$22% of the revenue comes from the Consumer Retail Trade sector.$Unity Software (U.US)$The new advertising platform is facing the risk of budget cuts right from the start. These risk factors may lead to the possibility of downgrading the earnings forecasts for related companies.

Furthermore, the number of layoffs in technology companies surged month-on-month in February 2025, reaching a peak since 2023. This phenomenon has raised concerns in the market about shrinking demand in the technology industry. Bank of America warned that if layoffs shift from 'efficiency optimization' to 'signs of demand shrinkage', then the earnings forecasts for the technology industry may face downward revisions.

However, current data shows that the year-on-year growth rate of payments by small and medium-sized businesses rebounded from 2.2% in the third quarter to 3.8% in the fourth quarter, and maintained a positive growth of 5.9% in January, indicating initial signs of recovery in the SMB market. This suggests that despite the wave of layoffs, there has not been a significant shrinkage in demand from small and medium-sized businesses, and the market still possesses a certain level of vitality and potential.

Investment strategy: Focus on infrastructure and the certainty of AI.

In the fluctuations of the economic cycle, leading enterprises in the infrastructure and back-end application sectors demonstrate strong counter-cyclical capabilities, becoming the preferred choice for investors seeking stable defense.$Microsoft (MSFT.US)$、$Oracle (ORCL.US)$、$CCC Intelligent Solutions Holdings (CCCS.US)$、$Workday (WDAY.US)$Companies, with their deep accumulation and strong position in the Industry, have formed a high level of stickiness with corporate budgets.

The demand for these services from enterprises usually lags behind the economic cycle by about three quarters, which means that even during economic downturns, these companies can maintain relatively stable demand and revenue. This characteristic makes them an ideal choice for investors seeking stable returns amid increasing market uncertainty.

With the rapid development of AI technology, the wave of AI productization has brought unprecedented growth opportunities to the Software industry.$Microsoft (MSFT.US)$、$Salesforce (CRM.US)$、$ServiceNow (NOW.US)$Companies have successfully monetized the AI functionality by deeply integrating AI technology into their products and services, thereby creating a vast total addressable market (TAM).

These companies' first-mover advantages and technological innovations in the AI field enable them to lead industry transformations, bringing high certainty of growth potential for investors. If investors can grasp this main theme, they are expected to gain substantial returns in the market expansion driven by AI technology.

Currently, the growth premium of Middle Cap Software stocks has fallen to a relatively low level since the end of 2022, providing investors with an opportunity for valuation recovery.$BILL Holdings (BILL.US)$、$Gitlab (GTLB.US)$、$Informatica (INFA.US)$For these symbols, there may be room for the correction of expectation differences.

The valuations of these companies have not fully reflected their actual growth potential and business value. As the market deepens its understanding and adjusts its expectations, a rebound in valuations is expected. Investors can pay attention to these Middle Cap Software stocks and explore the undervalued value within to achieve potential excess returns.

In summary, the strategy recommended by Bank of America encompasses a defensive selection of anti-cyclical varieties, a growth theme amid the AI wave, and opportunities for valuation recovery in Middle Cap software stocks. However, the current sector risk premium has already factored in overly pessimistic expectations, but Bank of America emphasizes that a clear bottoming signal has yet to be issued. Investors need to closely monitor the adjustments in corporate full-year guidance during the April earnings season, changes in the Federal Reserve's interest rate trajectory, and the evolution of geopolitical trade policies, as these factors will determine the pace and scope of valuation recovery.

Editor/ping