Nvidia's (NVDA 1.53%) highly anticipated fourth-quarter earnings report wasn't enough to lift its own stock, but it did give a boost elsewhere. Software stocks rallied on the report due in part to comments from Nvidia CEO Jensen Huang, and as Nvidia's update set off a rotation in the tech sector on Thursday from chip stocks to software-as-a-service stocks (SaaS).
Software stocks have been pummeled this year on fears that AI competitors like Anthropic's Claude Code will replace enterprise software programs, disrupting an industry valued at more than $1 trillion dollars. The ensuing panic has sent software stocks into a bear market, punishing even stalwarts like Microsoft (MSFT 0.73%).
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What Jensen Huang had to say
In an interview with CNBC following Nvidia's earnings call, Huang said of the perceived threat of AI to software, "I think the markets got it wrong," and he predicted that software companies would use Agentic AI to improve their products.
He also argued, as he has before, that AI agents would use existing software programs like Microsoft Excel to perform tasks.
As the leader of Nvidia, Jensen is an incumbent in the industry, so he may be more likely to defend the existing hierarchy than a CEO of an AI start-up would, but software stocks have continued to report strong results, despite the threat from AI, showing that there's not much evidence of disruption so far.
2 ways to capitalize on the sell-off
Almost every software stock from the dominant industry players to small-caps is down significantly from its peak, leaving investors with a plethora of opportunities here, but two options in particular seem like low-hanging fruit.
The first is the iShares Expanded Tech-Software Sector ETF (IGV 0.76%). This ETF has gotten a lot of attention in the recent software retreat as it offers the best way to get exposure to the biggest names in the SaaS sector, including Microsoft, Palantir, and Salesforce.
NYSEMKT: IGV
Key Data Points
Even after a recent rebound, the ETF is down 31% from its peak a few months ago. It currently trades at a price-to-earnings ratio of 29, which isn't cheap, but that looks like a good price to pay for software, which is historically one of the most expensive sectors on the market.
The second option is to buy Microsoft. Microsoft has gotten caught up in the software sell-off, down 28% from its recent peak, even though it's much more than just an enterprise software company.
Microsoft has Azure, a leading cloud infrastructure business and growth juggernaut; the Windows operating system; gaming in Xbox and Activision Blizzard; LinkedIn, and a substantial advertising business anchored by news and the Bing search engine. Additionally, its software products, like the Office suite, seem to be more entrenched than the typical SaaS issue.
NASDAQ: MSFT
Key Data Points
Microsoft currently trades at a price-to-earnings ratio of just 25, giving investors a discount to the S&P 500 to own one of the most diversified "Magnificent Seven" stocks and one that has grown revenue in the high teens in recent quarters. That looks like a no-brainer buy here.
