The software sector is lagging artificial intelligence stocks by an ever-widening margin, even as the AI trade has cooled. Morningstar senior equity research analyst Dan Romanoff attributes the steep declines to investor fears surrounding the impact of AI on the software industry.
Under the hood, however, software names are still putting up solid results. “The fundamentals haven’t changed much, but certainly the sentiment and the stock performance have diverged pretty wildly from the actual fundamental performance,” Romanoff says.
That’s a recipe for opportunity, even amid uncertainty as to how AI will impact margins and profitability down the road. In aggregate, Romanoff estimates that the software names he covers are now trading at a discount of roughly 25%.
Top Software Picks
Microsoft MSFT
“Results look good from all sides, with meaningful upside to our estimates on both the top and bottom lines. Revenue for all segments checked in above the high end of guidance. Critically, we see strength in Azure, in both traditional and artificial intelligence workloads.”
—Dan Romanoff on Microsoft’s latest earnings report
ServiceNow NOW
“Third-quarter results and guidance are a testament to the fact that ServiceNow continues to operate at a cut above other enterprise software vendors and lead on AI monetization. The firm topped our revenue and margin estimates for the quarter, which also supports our long-term view.”
“We raise our fair value estimate for wide-moat ServiceNow to $1,060 per share from $1,050 based on modest adjustments associated with results and guidance. We view the stock as undervalued and believe it offers the best combination of growth and profitability in software.”
—Dan Romanoff on ServiceNow’s latest earnings report
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