How to find the silver lining in downfall of cloud stocks

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Cloud computing and software-as-a-service stocks have been hit hard as investors fear higher interest rates, inflation and other headwinds will dampen tech spending in the new year, but some analysts see the pullback as a buying opportunity. as seen.

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Software stocks have risen as the new year approaches, with analysts at JPMorgan strongly suggesting that large gains in recent years have pushed stocks to fair valuations compared to expected growth in the near future. Both First Trust Cloud Computing ETF SKYY,
+0.07%
— which follows software-as-a-service, or SaaS, stocks — and the iShares Extended Tech-Software Sector ETF IGV,
-0.84%
Are down about 10% over the past three months, and are now only showing a low percentage gain of single digits over the past 12 months.

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For more: Salesforce, Adobe lead software sales amid growth concerns

In comparison, the S&P 500 Index SPX,
-0.41%
up 6% over the past three months, while the tech-heavy Nasdaq Composite Index comp,
-0.96%
is up 2%, and the S&P 500 is up 23% and the Nasdaq is up 14% over the past 12 months.

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Other analysts have followed the decline by offering their silver lining in the cloud — software stocks to target investors. Jefferies analyst Brent Thiel said in a recent note that valuations in the software sector have been raised, but fundamentals are “still alive.” While IGV rose only 12% to account for the S&P 500’s 27% gain in 2021, that follows the software ETF’s 52% growth in 2020, compared to the S&P 500’s 16% gain.

“Many will continue to shrink in ’22 as digital digestion follows the pandemic and 80% of software names are expected to decline (versus 43% in 2021 and 66% in 2020),” Thiel said. “We expect IGV to outperform the S&P 500 in ’22, driven by strong fundamentals after underperforming in ’21.”

Among Jefferies’ top picks are Microsoft Corp. MSFT,
+0.05%,
Adobe Inc. adbe,
-0.67%,
Salesforce.com Inc. crm,
-0.37%,
Inuit Inc. INTU,
-3.10%,
Palo Alto Networks Inc. PANW,
-1.39%,
Crowdstrike Holdings Inc. CRWD,
+0.80%,
and Sailpoint Technologies Holdings Inc. Cell,
-0.98%

RBC Capital Markets said in a note chaired by analyst Matthew Hedberg that it does not expect the trend of more experiences to be “digitally connected” to slow.

According to RBC, “Our fundamental thesis remains unchanged that 2020/21 will seismically change the technology landscape in a way that will shape the technology trends of the next decade and enable every organization to move ‘Faster to the Future’.” will increase.”

“Early COVID/[work-from-home] As tailwinds begin to fade and the sector faces a more challenging compass, we see a permanence of software trends that will continue over the next year (and decade) with a focus on cloud, hybrid-work, automation, AI and security changes ,” Hedberg said.

Watch these tech stocks fall up to 51%. Should you consider buying now?

This durability sells on “Nov/December as Omicron COVID vars fears, slowing COVID/WFH tailwinds, interest rate fears, tough CO, sector rotation, FX headwinds, margin pressures (labour crunch and some COVID – related cost savings (fading), and overall valuation fears” weigh on the sector according to RBC.

RBC Palo Alto Networks, CrowdStrike, ServiceNow Inc. Calculates shares like Now.
-1.33%,
Twilio Inc.
-3.54%,
Viva Systems Inc. VEEV,
-4.22%
and Coursera Inc. court,
-0.81%
One of its top picks for 2022.

Mizuho analyst Siti Panigrahi said it is not surprising that SaaS shares have turned “dull” due to expected interest rate hikes, and this sets up an ideal buying opportunity.

Panigrahi said, “We submit that this underperformance makes promising SaaS stocks all the more compelling, as the group’s valuation has fallen below its two-year rolling average support level, a dynamic that has slowed since March 2020 due to the COVID- Not seen after the initial shock of 19,” Panigrahi said.

The top picks in Mizuho include Palo Alto Networks, Atlassian Corp. Team.
-3.20%,
Intuit, Twilio and Autodesk Inc. ADSK,
-0.68%

Not so fast, ‘thin’ earnings beat poses a problem

UBS analyst Carl Kirstedt, however, took a more cautious view on the sector, which he called a “pattern of diluted 3Q beats” in the earnings report, and downgraded Salesforce and Adobe to keep ratings accordingly.

Kirstedt said he spoke with more than 25 large enterprise IT execs on their spending outlook for 2022 and shrugged off concerns that “‘front-office’ spending growth could moderate in 2022.”

While Kirstedt noted that much of the sell-off could be linked to inflation and the prospect of higher interest rates, “we are far more interested in the risk that the slowing of enterprise spending — the key fundamental risk — could explain the dismal at least partly.” There have been results in the software sector in recent months and that risk continues to weigh on this sector in 4Q21 and potentially for at least several more quarters.

From his conversations with IT execs, Kirstedt said that beneficiaries in 2022 include companies like Microsoft, Amazon.com Inc.’s AMZN.
-0.43%
AWS public cloud service, MongoDB Inc. mdb,
-0.01%,
and Snowflake Inc. Snow,
+0.87%

Of the stocks covered in this report, Microsoft, Intuit, and Palo Alto Networks have all gained more than 40% over the past 12 months, while Twilio, Veeva, CrowdStrike, SailPoint, and Autodesk are down 15% or more. Huh.

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