The S&P North American Technology Software Index has declined 30% from its high amid concerns about how artificial intelligence (AI) tools might disrupt the software industry. That puts the index, which tracks 111 software stocks, in bear market territory.
However, Jensen Huang, CEO of Nvidia (NVDA 1.53%), says the software rout is utterly illogical. Here are the important details, including five software stocks that now trade at very attractive prices.
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Jensen Huang says negativity surrounding software stocks is unwarranted
Several companies have introduced artificial intelligence (AI) tools that automate software development, letting programmers use natural language to generate, debug, and refine code. More recently, Anthropic introduced an AI tool (Cowork) built on similar architecture but targeted at non-technical workflows like sales, finance, and marketing.
Anthropic's Cowork is the root cause of the ongoing rout in software stocks. But Nvidia CEO Jensen Huang says the market has overreacted. "There's a whole bunch of software companies whose stock prices are under a lot of pressure because somehow AI is going to replace them," he remarked. "It is the most illogical thing in the world."
Ultimately, Huang thinks companies will use AI tools alongside existing software products to accomplish work, rather than using AI to reinvent software. "Would you use a hammer or invent a new hammer?" Huang asked rhetorically at a recent AI summit hosted by Cisco. From that perspective, several beaten-down software stocks look attractive.
These AI software stocks (down 24% to 73%) look attractive at current prices
Microsoft (MSFT 0.73%) has added generative AI copilots to popular software products like Microsoft 365, Dynamics 365, and Power Platform. Paid copilot seats increased 160% in the most recent quarter, and daily active users increased tenfold. The stock is down 27% from its high and currently trades at 26 times earnings. That is a rather cheap valuation for a company whose adjusted earnings increased 24% in the last quarter.
Datadog (DDOG 0.26%) provides performance monitoring software for large language models, and the company recently launched Bits AI SRE Agent, which automates incident investigation to help software engineers resolve issues. The stock is down 47% from its high and currently trades at 53 times adjusted earnings. While more expensive than the other stocks discussed, it is justifiable for a company whose adjusted earnings increased 20% in the last quarter despite aggressive R&D spending.
AppLovin (APP 2.53%) develops ad tech software that features a machine learning engine called Axon, which arguably delivers best-in-class targeting. The secret? Unlike many ad tech platforms for media buyers, AppLovin also owns a mediation platform that helps publishers monetize ad inventory. Data gathered from that mediation platform is used to train Axon. The stock is down 52% from its high and currently trades at 45 times earnings. That is cheap for a company whose earnings increased 96% in the last quarter.
Atlassian (TEAM 2.80%) has integrated a generative AI assistant called Rovo to its industry-leading work management and service management software. Rovo helps non-technical teams (e.g., marketing) search and summarize information, and automate certain tasks. Rovo also helps development and operations teams automate coding workflows. The stock is down 70% from its high and currently trades at 22 times earnings. That is cheap for a company whose adjusted earnings increased 27% in the last quarter
HubSpot (HUBS 0.61%) has introduced generative AI tools that automate work across sales, marketing, and customer service. It was the first customer relationship management software vendor to connect its platform to the three leading generative AI tools: ChatGPT, Claude, and Gemini. The stock is down 73% from its high and currently trades at 25 times earnings. That is relatively cheap for a company whose adjusted earnings increased 22% in the last quarter.
As a final thought, software stocks may continue to sink in the coming weeks and months, but patient investors are likely to do well if they purchase (at a reasonable price) stocks whose earnings are likely to be much higher five years from now.
