Software Stocks in a Bear Market? Nvidia CEO Says ‘Illogical’
The software sector has officially entered bear market territory, with the S&P North American Technology Software Index down 30% from its peak. This downturn is fueled by anxieties surrounding the disruptive potential of artificial intelligence (AI). However, Nvidia CEO Jensen Huang believes the market’s reaction is an overcorrection, calling the current pressure on software stocks “the most illogical thing in the world.”
The AI Disruption Narrative
The recent introduction of AI tools capable of automating software development has sparked concerns. These tools, utilizing natural language processing, can generate, debug, and refine code, potentially reducing the need for traditional programmers. Anthropic’s Cowork, designed for non-technical workflows like sales and marketing, has further intensified these fears.
However, Huang argues that AI will likely augment existing software rather than replace it entirely. “Would you use a hammer or invent a new hammer?” he asked at a recent AI summit hosted by Cisco, suggesting AI will be a tool used with software, not a substitute for it.
Five Software Stocks Looking Attractive
Despite the market downturn, several software companies are now trading at valuations that analysts consider attractive. Here’s a gaze at five:
Microsoft (NASDAQ: MSFT)
Microsoft has integrated generative AI copilots into its core products, including Microsoft 365 and Dynamics 365. Paid copilot seats increased 160% in the most recent quarter, with daily active users increasing tenfold. The stock is currently trading at 26 times earnings, a relatively cheap valuation given a 24% increase in adjusted earnings last quarter.
Datadog (NASDAQ: DDOG)
Datadog provides performance monitoring software for large language models and recently launched Bits AI SRE Agent, automating incident investigation. Despite aggressive research and development spending, adjusted earnings increased 20% last quarter. The stock trades at 53 times adjusted earnings.
AppLovin (NASDAQ: APP)
AppLovin’s ad tech software features Axon, a machine learning engine delivering targeted advertising. Its unique position – owning both a mediation platform for publishers and an ad platform for buyers – provides valuable data for training Axon. Earnings increased 96% last quarter, and the stock trades at 45 times earnings.
Atlassian (NASDAQ: TEAM)
Atlassian has integrated Rovo, a generative AI assistant, into its work management and service management software. Rovo assists both technical and non-technical teams with tasks like information search, summarization, and automation. Adjusted earnings increased 27% last quarter, and the stock trades at 22 times earnings.
HubSpot (NYSE: HUBS)
HubSpot was the first CRM vendor to connect its platform to ChatGPT, Claude, and Gemini, offering generative AI tools for sales, marketing, and customer service. Adjusted earnings increased 22% last quarter, and the stock trades at 25 times earnings.
The $660 Billion Capex Buildout
Nvidia’s own outlook remains strong. CEO Jensen Huang recently stated that the company’s $660 billion capital expenditure buildout is sustainable, reassuring investors concerned about the massive investment. Nvidia’s shares rose 8% following Huang’s comments.
Strategic Partnerships Fuel Growth
Microsoft, Nvidia, and Anthropic have announced strategic partnerships, further solidifying the role of AI in the future of software. These collaborations aim to accelerate innovation and deliver new solutions to customers.
FAQ
Q: Is AI really going to replace software developers?
A: Nvidia CEO Jensen Huang believes AI will primarily augment developers, helping them work more efficiently, rather than replacing them entirely.
Q: Are software stocks still a solid investment?
A: Despite the current bear market, several software stocks are trading at attractive valuations and have strong growth potential.
Q: What is Nvidia’s role in the AI revolution?
A: Nvidia provides the critical technology needed by companies like Intel to develop and deploy AI solutions.
Q: What is the S&P North American Technology Software Index?
A: It tracks 111 software stocks and is currently down 30% from its high, indicating a bear market.
Did you understand? Nvidia now has visibility into “half a trillion dollars” in revenue, surpassing Apple and Microsoft in valuation to reach $5 trillion.
Pro Tip: Patient investors who purchase stocks with strong earnings potential at reasonable prices are likely to see long-term gains.
What are your thoughts on the future of software and AI? Share your insights in the comments below!
