Software stock meltdown 'couldn't have been better timed' | Financial …
The recent correction in U.S. software stocks has created an opportunity, says Richard Davis at Canaccord Genuity, who is telling clients to inch their way back into the sector.
The analyst believes it is very unlikely that the “March Meltdown” signals a repeat of 1973, 2001 or 2008, since those episodes were accompanied by meaningful economic weakness.
“Investors are letting stock prices tell them what the fundamentals of companies are rather than vice versa,” Mr. Davis said, noting that fundamentals in the cloud software business are quite strong. “The fact is that everyone, this analyst included, got sloppy.”
Mr. Davis believes share prices rose because revenues climbed, while management teams no longer apologized for losses, but rather stressed the need to go after this massive market even if it meant losing money.
“We consistently warned companies that investor sentiment changes much faster than a firm’s ability to change its business model,” he said. “Making money is an insurance policy against shifting sentiment.”
Earnings season at the end of April should help turn things back in the sector’s favour, but the analyst highlighted what he thinks the meltdown is all about.
That includes the doubling of cloud stocks available to buy, insider distributions, buyer exhaustion at the flood of IPOs, and the volatility that comes with companies that don’t produce profits.
It may be unlikely, but if these momentum stocks continue to trade at low levels, Mr. Davis warned that management teams will need to issue more stock options to keep their best employees.
“Indeed, this meltdown couldn’t have been timed better if you were to arrange it on purpose,” the analyst said, noting the first software earnings reports of the March quarter are still a couple of weeks away. “What we strongly believe is that Wall Street’s March Meltdown has not affected corporate IT buyer behavior — our checks with regard to demand are unchanged and remain strong.”
He believes the recent rush to classic safety names such as Microsoft, Oracle, Hewlett-Packard and other low P/E stocks will be temporary.
Mr. Davis’ best ideas list includes AspenTech, LifeLock and Salesforce.com, then Demandware, ServiceNow and Veeva.
The analyst also cautioned against chasing M&A speculation at this point, as he thinks stocks need to stay down fore more than a few weeks to convince boards to entertain buyout bids.
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Software stock meltdown 'couldn't have been better timed' | Financial …
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