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The Appeal of Software Stocks: Goldman Sachs Weighs in
Strong Year for Tech Stocks
According to a note from Goldman Sachs, software stocks have already experienced a 37% surge in the year to date. However, the investment bank believes that there are still more promising opportunities ahead for these stocks. They attribute this potential to multiple factors such as a cyclical recovery, pricing, Gen-AI product cycles, and continued margin expansion in the future. Goldman Sachs further explains that software companies are well-positioned to outperform in the second quarter and for the remainder of the year. They predict a return to the more typical beat-and-raise cadence associated with software companies.
Six Promising Software Stocks
Goldman Sachs identifies six software stocks that still offer strong investment opportunities: Adobe, Salesforce, Monday.com, Microsoft, ServiceNow, and Workday. They believe that these stocks have the potential for a higher re-rating due to the favorable top-line impact of Generative Artificial Intelligence (Gen-AI) and below-average EV/FCF multiples. FactSet data shows the average upside to price targets given by analysts who cover these stocks.
Increased Software Spending Expected
Goldman Sachs notes that rising interest in generative artificial intelligence is leading companies to reevaluate their IT budgets and invest in next-generation solutions. This could result in increased spending on software in crucial areas that may have been cut from budgets due to financial constraints. The investment bank predicts that this focus will likely shift to the seasonally strong fourth quarter. Companies are reassessing their IT budgets and digital needs, which could lead to a release of pent-up demand during this time.
In conclusion, Goldman Sachs is optimistic about the future performance of software stocks. They believe that a combination of favorable factors and a recovery in the macro environment will drive these stocks higher. Investors may want to consider adding these software stocks to their portfolios for long-term growth potential.
Hot Take: Potential Impact on New Businesses
The analysis provided by Goldman Sachs regarding the appeal of software stocks and the positive outlook for the industry has implications for new businesses, especially those operating in the technology sector. Here are a few key points to consider:
1. Funding Opportunities: With the surge in software stocks and the positive sentiment surrounding the industry, investors may be more willing to provide funding to new businesses involved in software development. This could create opportunities for startups to secure the necessary capital to bring their innovative ideas to life.
2. Market Expansion: As companies reassess their IT budgets and prioritize next-generation solutions, there is an increased demand for software services and products. New businesses in the software sector could capitalize on this trend by offering cutting-edge software solutions that cater to the evolving needs of organizations.
3. Collaboration Potential: With larger software companies like Adobe, Salesforce, and Microsoft being identified as promising investment opportunities, new businesses operating in related fields may find potential partnership opportunities. Collaborating with established players in the industry can provide access to resources, expertise, and customer networks, which can be invaluable for a new business looking to gain a competitive edge.
4. Competitive Landscape: As the demand for software continues to grow, it is essential for new businesses to stay ahead of the curve and differentiate themselves from existing competitors. This means focusing on innovation, user experience, and customer-centric approaches to ensure a sustainable and successful future in the software industry.
In summary, the positive outlook for software stocks presents new businesses with opportunities for funding, market expansion, potential collaborations, and sets the stage for healthy competition in the industry. By capitalizing on these trends, new businesses can position themselves for growth, success, and investor interest in the fast-paced world of software.
Article First Published at: https://www.cnbc.com/2023/08/01/goldman-names-6-tech-stocks-with-strong-investment-opportunities.html