Guggenheim Says Time to Revisit Software Stocks After AI Rout

After a brutal selloff in software stocks earlier this year, Guggenheim analysts believe it's time to revisit the sector. In a research note released today, the analysts pushed back against the "fatal AI bear case" that had weighed on software stocks, arguing that the market has overreacted.

Rating Change

Guggenheim upgraded the software sector from Neutral to Overweight, with a particular focus on Salesforce (CRM) and ServiceNow (NOW) as top picks.

Analyst Rationale

The analysts argue that the market has overestimated the threat of AI to traditional software companies. They note that roughly 80% of software stocks are currently trading below their intrinsic value, presenting a compelling buying opportunity. They also believe software companies will be long-term beneficiaries of AI, not victims.

Context

The iShares Expanded Tech-Software Sector ETF (IGV) rose 3.3% following the report, reflecting investor optimism. This comes after software stocks had tumbled earlier in the year on fears that AI could reduce the need for traditional software.

What to Make of It

Guggenheim's upgrade doesn't guarantee a rebound for all software stocks, but it highlights a potential opportunity in fundamentally strong companies that may be undervalued.