Software Stocks See 'Disconnected' Sell-Off as Analyst Sees Opportunity

Top tech analyst Dan Ives believes the recent sell-off in software stocks is disconnected from their underlying business fundamentals. This year, shares of Microsoft (MSFT), Salesforce (CRM), and ServiceNow (NOW) have underperformed the broader market, with declines as steep as 29% year to date. However, recent earnings results suggest that Wall Street may be wrong to discount these companies.

Microsoft, which is roughly flat for the year, reported an 18% year-over-year increase in revenue last quarter, driven by surging demand across its Azure enterprise cloud platform and paid Microsoft 365 Copilot seats. ServiceNow's subscription revenue grew at high rates, up 23% in constant currency in the second quarter, while Salesforce posted a 14% year-over-year increase in first-quarter revenue.

Ives argues that software is the 'heart and lungs' of the AI build-out, and these companies are providing the data, security, and workflow orchestration necessary for AI models to perform productive work. However, there are risks to watch, including heavy investments in AI infrastructure by Microsoft, which could pressure near-term earnings.