The broad stock market might be heating up again, with the tech sector continuing to flex its muscles. But, underneath the surface, not everything is great for all corners of tech. The hardware players (semis and more) have been doing far more than their fair share of the lifting, while the software players have continued to drag their feet.
Of course, the contrarian move would be to ditch (or short) semiconductor stocks that have already gone parabolic or just straight up, while going long on the many battered software plays that most investors don’t seem to be willing to give the benefit of the doubt, as AI and agents threaten their economic moats.
It’s hard to tell who wins and loses at the application layer, as AI-native companies and model makers look to expand their reach rapidly to show investors they can make big money, not just spend it. As the call for monetization grows, the software stocks could remain under serious pressure, and the selling might get out of hand, such that there’s serious deep value to be had as the industry looks to enter depths not seen before.
The pain in software might not yet be done as AI moves in
With Intuit (NASDAQ:INTU | INTU Price Prediction) shares crashing 20% in a single trading session following an earnings beat, it feels like AI is absolutely going to take the lunch of the SaaS darlings that used to command a premium in the market. Nowadays, many such software names go for a discount in the market.
And this discount might grow over time, especially with the pace of innovation going on in AI, which is quite unprecedented. It’s going so fast that the disruptive wave is sweeping and things are breaking down in the software scene, while semis and all the names on the right side of the disruptive wave melt up in an equally explosive fashion.
Of course, it’s hard to touch the software stocks with a barge pole these days. And for those who’ve held on the way down, it’s becoming excruciating to keep hanging on, especially as the thesis and moat wither away with every new update from an AI innovator.
The market is realizing that not all software is created equally
So, does it make sense to embrace the stench and buy something in the bargain bin? Or is a reversion of the mean for software (that would entail a steep upside move) off the table because of how the narrative and business model have changed for good? Selling seats for software became a whole lot harder, and as software quarters come out, I think it’s going to be make-or-break.
In recent quarters, we’ve already seen the unfairly punished software names bounce back. Think names like CrowdStrike (NASDAQ:CRWD) and Datadog (NASDAQ:DDOG), which rebounded with fury to hit a new high, seemingly correcting the market’s mistake for dragging them down along with the rest of software. So, what remains? There are still a lot of names in software that have yet to correct to the upside. But I do think some are prime candidates to revert higher. Need ideas for the rest of the year?
Why Microsoft and Adobe are real bargains
Look no further than the recent hedge fund buys. Microsoft (NASDAQ:MSFT) and Adobe (NASDAQ:ADBE) are still down, but could be next in line for a correction to the upside.
For Microsoft, it’s more of an AI play than a software play at this point, with Azure, Copilot, and the wonderful AI team working hard behind the scenes to produce a model (MAI) in parallel with OpenAI.
Add the Maia chip into the equation, and the investment, as well as ongoing discussions with Anthropic, into the equation, and Microsoft seems like such an obvious software bargain bin name to pick up. It’s a popular buy of a handful of hedge funds last quarter for a reason.
As for Adobe, the bear thesis has already had a few years to bake. And, at this point, I think that any positive developments with the firms’ Firefly could be a source of sustained gains. At the end of the day, Adobe seems like more of a play on human augmentation than automation.
It’s a great AI tool that I think is made better with the Nvidia (NASDAQ:NVDA) partnership. Jensen Huang sounded incredibly bullish on Adobe. It’s not an “AI loser,” and I think it’s about time the market takes his word for it. Either way, the many hedge fund buyers haven’t wasted time adding to their positions in Q1.
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