Software stocks have lost their shine, but these players can outperform

Our theme of Mid-Cap Software Stocks† software players with a market cap of between $2 billion and $10 billion, and who have increased their revenues by at least 50% in the past two years, have underperformed significantly. The theme continues to fall by about 36% year-to-date in 2022. In comparison, the S&P 500 continues to fall 22% year-to-date, while the Nasdaq-100 continues to fall about 31%. With inflation soaring in the US and the Federal Reserve raising interest rates faster than expected, investors have pulled out of fast-growing technology stocks with high multiples count. There are also concerns about the US economy, with the likelihood of a recession in the coming quarters increasing as the yield curve inverts. In addition, the wind that software companies saw earlier in the pandemic is cooling off from the trend of remote working, with employees returning to the office.

So what’s the outlook for the theme? Last week, the Fed hiked rates by 0.75%, the largest hike since 1994, and more similar hikes look likely as inflation remains stubbornly high. Rising yields could make bonds more attractive, effectively pushing people away from the riskier high-multiple stocks and mid-cap names in the theme, many of which remain loss-making. That said, we still think the theme could remain a fairly strong long-term bet for a number of reasons. Total software spending is likely to remain robust, thanks to the company’s greater digitization, as well as the software industry’s broader pivot to the cloud and more stable, recurring revenue models. This should help the stocks in our theme as they offer somewhat niche, yet well established software and services. The recent correction could be a good entry into the theme.

Within our theme, Anaplan stock is the largest in terms of valuation, with a market cap of nearly $10 billion. The stock is also one of the best performers in our theme, up approximately 39% year-to-date, following its acquisition by private equity firm Thoma Bravo. Asana Stock, a company that sells mobile work management platforms, is the fastest growing company, with 12-month revenue growing 87%. Veeva Systems stock is one of the most profitable stocks in our theme, with an operating margin of approximately 25% over the past 12 months.

Stock prices have fallen rapidly across all sectors in recent months and we are now in a bear market for the first time since March 2020, when the Covid-19 outbreak caused a market crash. We capture key trends in the Dow during and after major market crashes in our interactive dashboard analysis,”Market crashes compared†

What if you’re looking for a more balanced portfolio instead? U.S high-quality wallet and multi-strategy portfolio have consistently beaten the market since late 2016.

Invest with Trefis Wallets that beat the market

See everything Trefis Price estimates