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Morningstar: AI Software Stocks Sell-Off Overreaction, Microsoft and ServiceNow Recommended
Morningstar believes the recent AI-fueled meltdown in software stocks was an overreaction. The firm identifies buying opportunities in specific companies. Specifically, Morningstar AI software stocks like Microsoft and ServiceNow are seen as potential bargain buys.
What Happened
Software stocks recently faced significant pressure. This decline stemmed from fears that Anthropic’s Claude AI assistant could disrupt companies and IT departments. The iShares Expanded Tech-Software Sector ETF (IGV) fell 19% from January 26 to February 5, reflecting these concerns.
Details From Sources
Dan Romanoff, a senior equity analyst at Morningstar, stated that these fears are largely overdone. He believes the selling represents a prime dip-buying opportunity for investors. Romanoff noted “little evidence that the bear case is unfolding,” citing solid retention rates and other software metrics. (Source: Business Insider)
Romanoff also asserted that enterprise software customers are not threatened en masse by internal solutions. He highlighted that AI products are not currently generating substantial revenue for software vendors. Furthermore, management teams are reportedly fearing AI “hallucinations and rogue agents.” Publicly traded software companies generally indicate AI solutions account for approximately 2% of revenue (or ARR). OpenAI’s revenue, for example, skews heavily toward consumer subscriptions. (Source: Business Insider)
Drawing historical parallels, Romanoff referenced prior automation instances that did not cause major labor market disruptions. He mentioned Salesforce’s CRM approach as an example. The analyst specifically pointed to Microsoft and ServiceNow as beaten-up stocks. He sees them as having “substantial upside.” (Source: Business Insider) Shares of Microsoft were down 17% year to date, and ServiceNow shares were down 35% year to date.
Why This Matters
Morningstar’s analysis offers an important perspective for investors. It suggests the market’s reaction to AI disruption fears might be exaggerated. This presents potential “bargain buy” and “prime dip-buying opportunity” for specific software stocks, influencing investment strategies.
Background Context
Investors have been consistently concerned that AI could significantly disrupt or “eat” the software industry. This pervasive fear has contributed to market volatility. Furthermore, firms have publicly expressed skepticism about AI’s current revenue generation capabilities.
Industry Reactions
Following the significant sell-off, software stocks rallied on Friday. The iShares Expanded Tech-Software Sector ETF (IGV) rose 3%. Simultaneously, the Nasdaq increased by more than 2%, signaling a broader market recovery.
Related Data or Statistics
- The iShares Expanded Tech-Software Sector ETF (IGV) fell 19% from January 26 to February 5.
- AI solutions account for approximately 2% of revenue (or ARR) for publicly traded software companies.
- Shares of Microsoft were down 17% year to date.
- Shares of ServiceNow were down 35% year to date.
Future Implications (SPECULATIVE)
Romanoff issued a warning regarding future market conditions. He stated, “The software landscape is not for the faint of heart at present.” He also noted that “seat counts may be pressured at some point in the future.” However, he emphasized there is no current evidence of this happening. This highlights potential long-term risks but acknowledges present stability.
Conclusion
Morningstar maintains its view that the software stock sell-off was overdone. Despite significant market fears regarding AI’s impact on software, the firm sees opportunities. Companies like Microsoft and ServiceNow offer attractive entry points for investors, according to their analysis.
Explore Further
Explore further market insights and analysis regarding the software sector and AI’s evolving impact on investments.
FAQ
Q1: Why does Morningstar consider the recent AI software stock sell-off an overreaction?
Morningstar, through analyst Dan Romanoff, believes the sell-off is an overreaction because AI products are not yet generating substantial revenue for software vendors, firms show skepticism towards AI, and historical automation instances did not cause major disruptions.
Q2: Which two software stocks does Morningstar recommend?
Morningstar recommends Microsoft and ServiceNow, viewing them as “bargain buy” opportunities with “substantial upside” after their recent declines.
Q3: What prompted the recent decline in software stocks?
The recent decline in software stocks was driven by investor concerns that Anthropic’s Claude AI assistant could disrupt the software industry, leading to a significant drop in the sector ETF.
Q4: What percentage of revenue do AI solutions currently account for at publicly traded software companies?
Publicly traded software companies generally report that AI solutions account for approximately 2% of their revenue (or ARR).
