On February 5, a recovery in U.S. software stocks was observed, with the iShares Expanded Tech-Software Sector ETF (IGV) rising over 3% and the Nasdaq index increasing by more than 2%. This rebound follows a significant decline where the IGV dropped 19% between January 26 and February 5, as investor sentiment soured due to concerns over Anthropic’s AI assistant, Claude, potentially disrupting the software industry.
Morningstar analysts have described current fears surrounding the software sector as largely exaggerated, presenting a buying opportunity for investors. Dan Romanoff, a senior equity analyst at Morningstar Inc., cited Microsoft and ServiceNow as two stocks that have experienced considerable declines, with year-to-date decreases of 17% and 35% respectively. Romanoff believes these companies possess substantial growth potential, estimating a fair value of $600 for Microsoft’s stock, indicating a possible 50% increase, and a fair value of $200 for ServiceNow, suggesting a potential 100% rise.
Despite the bearish sentiment, Romanoff maintains that core software metrics remain strong, and fears over corporate clients shifting to in-house solutions are overstated. He emphasized that while there are risks, the current market climate offers significant investment opportunities for those willing to engage.