Investors have been cautious about high-growth technology stocks in 2024, with broader market uncertainty and concerns over President Donald Trump’s tariff policies putting pressure on valuations.
The Nasdaq Composite has declined 6% so far this year as investors rotate out of last year’s best-performing stocks and software companies have not been immune to this downturn.
The iShares Expanded Tech Sector exchange-traded fund, which includes major software firms, has fallen 4.5% this year and is down 10% from its all-time closing high of $108.46 in February, according to Dow Jones Market Data.
However, analysts at Evercore ISI believe the recent sell-off presents a buying opportunity.
Kirk Materne, an analyst at the firm, wrote in a research note this week that investors should consider “leaning in” to software stocks, given their attractive valuations and potential for AI-driven growth.
AI monetization strengthens long-term outlook
Materne highlighted five software companies as his top picks: Salesforce, Microsoft, Intuit, Snowflake, and Workday.
He noted that all five are trading below their five-year average forward price-to-earnings ratios, making them more attractive after recent declines.
For instance, Microsoft is trading at 27.9 times forward earnings, compared to its five-year average of 29.5 times, while Salesforce is valued at 25.9 times, down from its five-year average of 40.4 times.
Beyond valuation, Materne pointed to artificial intelligence as a key growth driver for these firms.
Companies like Salesforce are already integrating AI into their platforms, offering tools such as Agentforce, an AI-powered customer engagement tool.
Since its launch in October, Salesforce has closed 5,000 deals for Agentforce, and Materne estimates the product could contribute $1 billion in incremental revenue by 2026.
“While it is super early days — the monetization of Gen AI has begun and will build momentum over the remainder of the year,” he wrote.
“We believe the big are going to get bigger in a Gen AI world and we believe the AI narrative in software will only get stronger as the year progresses.”
Dim financial forecasts, economic challenges pose risks
Despite the positive outlook, some risks remain.
Recent earnings reports from Salesforce, Microsoft, and Intuit included financial forecasts that fell short of analyst expectations, raising concerns about near-term revenue growth.
Additionally, broader economic challenges, including potential business spending slowdowns due to rising tariffs, could pose headwinds for the sector.
Trump’s new tariffs could impact business spending, forcing some companies to scale back technology investments.
However, Materne believes software firms are relatively insulated from these effects.
Many software contracts operate on long-term subscription models, limiting immediate financial risks.
Moreover, software solutions focused on efficiency and automation are likely to remain in high demand, even in a tighter economic environment.
“We believe the setup for software remains favorable when taking a 3-6 month view,” Materne wrote.
While risks persist, Evercore’s analysis suggests that investors willing to weather short-term volatility may find compelling opportunities in software stocks as AI adoption accelerates and valuations remain attractive.
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