Investor Dan Ives Declares Software Apocalypse a ‘Generational Buy’: Is He Right?
As the software industry grapples with fears of AI disruption, Wedbush analyst Dan Ives presents a different perspective. He believes the current market downturn is one of the most severe in 25 years. Ives warns that investors may be misjudging the future of enterprise software in an AI-driven landscape, calling it a ‘Generational Buy.’
Unpacking the Current Software Selloff
Recent statistics reveal a sharp decline in software stocks. Notably:
- Salesforce (NYSE: CRM): Down 28% in 2023, trading at $189.72.
- ServiceNow (NYSE: NOW): Down 30.1% in 2023, trading at $107.08.
- Microsoft (NASDAQ: MSFT): Down 17% this year.
Despite the downturn, Ives argues that AI will enhance existing software rather than replace it. This view is echoed by other financial experts, including Morgan Stanley and Goldman Sachs. Morgan Stanley anticipates that generative AI could increase the enterprise software market by approximately $400 billion by 2028.
Salesforce: A Case Study in Valuation
The valuation of Salesforce is particularly notable. It currently trades at just 14.4 times forward earnings. This is despite posting a remarkable $900 million in annual recurring revenue (ARR) from its Data Cloud and AI initiatives, which marks a year-over-year growth of 120%.
Salesforce CEO Marc Benioff emphasizes the company’s position, urging investors to “beware of the false agent” and reassuring them that Salesforce remains ahead of the competition with its innovative Agentforce platform, which serves over 3,000 paid customers.
ServiceNow: Strong Performance Amid Selloff
ServiceNow recently reported impressive third-quarter revenue of $3.41 billion, reflecting a 22% increase compared to the previous year. Nevertheless, the positive financial results have not prevented the stock from declining.
The market sentiment currently suggests that traditional SaaS models may become obsolete due to AI advancements. ServiceNow’s proactive expansion efforts, including acquisitions in the security space, indicate that the company is prepared for the challenges posed by AI.
Microsoft: Resilience in the AI Arena
Even as a leading player in AI, Microsoft faces challenges. The company’s stock has dropped 17% this year, largely due to investor concerns surrounding its growth projections for Azure, which fell short of expectations. Consequently, Microsoft’s ability to balance internal projects with demand for its Azure services has led to difficulties in maintaining stock stability.
Currently trading at around 21 times earnings, Microsoft is perceived as a moderate buyer’s opportunity. Analysts predict that Microsoft will earn $18.85 per share next year. If the stock falls further, the company could become more attractive to investors.
The Verdict on Software Investments
According to Ives, the current selloff represents a disconnect between the market’s valuation and the fundamental value of companies in the software sector. He points out historical examples like the dot-com crash and the 2008 financial crisis, where strong companies faced depressed valuations during periods of market panic.
For Ives’ optimistic outlook to materialize, it is essential that AI adds to the software market rather than substitute existing models. The future trajectory of enterprise software hinges on successful AI integration rather than displacement.
In conclusion, while the market currently reflects a pessimistic sentiment, Ives advocates viewing software stocks through a lens of potential growth and innovation.
