Cloud computing and software-as-a-service shares took a hit as investors fear rising interest rates, inflation and other headwinds will dampen technology spending in the new year, but some analysts see the pullback as a buying opportunity.
Software stocks have been blown away by the new year, with analysts from JPMorgan noting loudly that big gains in recent years have sent stocks to appropriate valuations compared to expected growth in the near future. Both First Trust Cloud Computing ETF SKYY,
– which tracks software-as-a-service or SaaS inventory – and iShares’ extended technology and software segment ETF IGV,
It’s down about 10% in the past three months, and is now only showing low single-digit gains in the past 12 months.
More Info: Salesforce Leads Adobe to Sell Its Software Amid Growth Fears
In comparison, the S&P 500 SPX Index,
It is up 6% over the past three months, while the high-tech Nasdaq Composite Index,
The S&P 500 is up 2%, and over the past 12 months, the S&P 500 is up 23% and the Nasdaq is up 14%.
Other analysts followed the declines by offering their silver linings to cloud retreats – software stocks for investors to target. Jefferies analyst Brent Thiel said in a recent note that while valuations are stretching in the software sector, the fundamentals are “alive.” While IGV only gained 12% from the S&P 500’s 27% gain in 2021, this follows the ETF’s 52% increase in 2020 compared to the S&P 500’s 16% gain.
“Complication pressure will continue into 22 as digital digestion occurs post-pandemic and 80% of software names are expected to slow (vs 43% in 2021 and 66% in 2020). We expect IGV to outperform the S&P 500,” said Thiel. in ’22 driven by strong fundamentals after poor performance in ’21.”
Top picks from Jefferies Microsoft Corp. MSFT,
Adobe Inc. ADBE,
Salesforce.com Inc. CRM,
Inuit Inc. INTU,
Palo Alto Networks Inc. bano,
CrowdStrike Holdings Inc. CRWD,
and SailPoint Technologies Holdings Inc. SAIL,
RBC Capital Markets, in a note led by analyst Matthew Hedberg, said it does not expect the trend for more experiences to slow to become “digitally correlated.”
According to RBC, “Our core thesis remains unchanged that 2020/21 has seismically changed the tech landscape in a way that will largely shape the next decade for technology trends and propel every organization ‘faster into the future.’”
“During the initial COVID/[work-from-home] The tailwinds begin to wane and the sector faces more challenging companies, and we look forward to continuity of software trends that will continue through the year (and the next decade) with a focus on cloud, hybrid work, automation, artificial intelligence, and security transformations,” he said.
See also: These tech stocks are down as much as 51%. Should you consider buying now?
This robustness outperforms the “November/December selling due to fears of the COVID variant from Omicron, sluggish COVID/WFH tailwinds, concerns about interest rates, difficulties, sectoral rotation, currency market headwinds, margin pressure (from labor shortages and some savings). The costs associated with COVID are fading), and public valuation concerns “are weighing on the sector, according to RBC.
RBC counts like stocks like Palo Alto Networks, CrowdStrike and ServiceNow Inc. NOW,
Twilio Inc. TWLO,
Veeva Systems Inc. VEEV,
and Coursera Inc. COUR,
Among her top picks for 2022.
It’s no surprise that SaaS shares have been “weakened” by expected interest rate increases, said Mizuho City Analyst Panigrahi, and this presents an ideal buying opportunity.
“We recognize that this poor performance makes promising SaaS stocks look more convincing after the group’s valuation fell below the two-year rolling support level, a dynamic not seen since March 2020 after the initial shock of COVID-19,” Bannegrahi said.
Top picks at Mizuho include Palo Alto Networks and Atlassian Corp. TEAM and
Intuit, Twilio, Autodesk Inc. ADSK,
Not so fast, the “meager” profit beats are a problem
However, UBS analyst Karl Kirsted has a more cautious view of the sector, given what he called a “thin 3Q strike pattern” in earnings reports, thus downgrading Salesforce and Adobe to hold valuations.
Kirsted said he spoke with more than 25 IT executives at a large organization about their spending forecasts for 2022 and came away with concerns that “front-office spending growth could slow in 2022.”
While Kirsted said a lot of the sell-off could be related to inflation and the possibility of higher interest rates, “we are much more concerned with the risk that the slowdown in corporate spending – the main underlying risk – may at least partly explain the uninspiring results across the software sector in recent months and that this risk It’s still weighing on the sector in Q421 and possibly for at least several more quarters.”
In his conversations with IT executives, Kirsted said that beneficiaries in 2022 appear to include companies such as Microsoft and Amazon.com Inc’s AMZN subsidiary,
AWS public cloud service, MongoDB Inc. MDB,
and Snowflake Inc.
Among the stocks covered in this report, Microsoft, Intuit, and Palo Alto Networks have gained more than 40% in the past 12 months, while Twilio, Veeva, CrowdStrike, SailPoint and Autodesk are down 15% or more.