Has the Golden Era ended for software stocks?

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In the last few weeks, software peers SentinelOne, UiPath, and Veeva reduced their full-year revenue guidance due to economic weakness and competition from generative AI (in terms of corporate investments). Salesforce shares plummeted almost 20% recently on disappointing guidance. So, what’s going on? The reason is simple. There is an enormous competition for IT spend right now. In the past decade, software stocks (asset-light, higher profit) crushed computer hardware stocks (asset-heavy, lower-profit). - The NYSE Arca Computer Hardware Index rose 312% in the last 10 years, while the the Dow Jones US Software Index delivered a 576% gain in the same period. But things have changed this year. Year-to-date, hardware tech stocks outperformed software tech stocks by 30%. Here’s what is happening: Companies are investing in infrastructure in order to build generative AI products. This means lots of chips. - "This GenAI cycle is infrastructure, all infrastructure," said Baird's Ted Mortonson. "The cloud titans are now spending $200 billion this year, which is up 50% on data centers. That's the horsepower, or the engine of Gen AI." Baird's Ted Mortonson (Photo: Yahoo Finance) So, corporations are shifting their IT spending from software to hardware, affecting revenue growth for many SaaS stocks. - "Major corporations realize that AI is a 'must get it right' proposition, and as a result are overweighting semis and hardware spend, at the expense of software spend currently. We expect this to continue for the foreseeable future," strategist Larry Tentarelli of Blue Chip Daily told Business Insider. What’s more, the timeline for corporations to be ready to spend on GenAI software looks to be a long time away. Many of them still need to update their technology infrastructure. - "30% of the Fortune 500 have moved to the cloud. 10% of that are Gen AI capable. So, we have a long way to go for software and an acceptable return on invested capital to materialize. That's why you're not seeing it in software. There is no return on invested capital because there's no applications. So, you're building the car and the engine, but you have no passengers in software," Mortonson said. Another problem is that companies will need to structure their data in a new format to align with GenAI. The process is estimated to be 15 months at minimum. A few companies have started this process, so it may not happen until “late 2025 to 2026” said Mortonson. So, Mortonson expects tech hardware stocks to outperform software stocks through 2025. That’s something to monitor as an investor because there’s a huge competition for tight IT budgets right now. Top Stock With Massive Scale Advantage Over Competitors Today’s Pick: ICON PLC (ICLR) When a pharmaceutical company develops an exciting new product, they must go through rigorous clinical trials to receive FDA’s approval before it sees any daylight in the marketplace. And finding people to be part of the clinical trials is a logistical headache. Hence ICON PLC -- which is today’s stock pick. The company is a clinical research organization (CRO), which is responsible for recruiting and overseeing clinical trials for big pharma corporations. It’s a fantastic business. In fact, ICON has been growing steadily since 2001: (Source: ICON Investor Presentation) Case study: Remember the pandemic? (Sorry to bring it up.) It called for possibly the most critical clinical trials in the history of medicine. BioNTech and Pfizer developed vaccines, and they needed participants to get FDA approval as soon as humanly possible. Guess who they hired to do the job? ICON. ICON oversaw the clinical trials for BioNTech’s and Pfizer’s vaccine, and the scope of the trial might surprise you. Over three months, ICLR recruited and studied 44,000 participants in 150 locations across six countries. The result was, as you know, history: the BioNTech-Pfizer vaccine became the fastest vaccine ever developed. Now, the size of a CRO is vital in the pharma world. The reason is simple. The industry is made up of several 800-pound gorillas, like Johnson & Johnson, Pfizer, AbbVie, Mercek, Bristol Myers Squibb, and AstraZeneca. They require a large organization that is capable of handling the size of their projects. Colin Shannon, PRA’s CEO, highlighted the importance of scale in the company: - “...Pharma are massive, and they want to partner with companies that they can keep up with them and have the capability to continue to grow ... So we'll be able to actually be able to grow a lot more substantially with some of the larger clients,” said PRA CEO Colin Shannon. Indeed, pharmaceutical companies are more confident with taking on the kinds of larger studies that they previously couldn’t support without ICON. All in all, ICON has accumulated over $23 billion in backlog. To put that into perspective, the company reported $8.1 billion in revenue last year -- and this doesn’t include PRA’s backlog yet, either! (Source: ICON PLC Q2 2021 Investor Presentation) Going forward, ICON expects mid-teens annual growth in adjusted earnings per share. It expects FY24 to post 14.5% to 18.5% growth for adjusted EPS. Bottom line: ICON looks like a solid stock that offers an unique niche. Scale matters in this business, so it will be difficult for competitors to match ICON’s scale. So, this is a stock that’s worth a look for you. [EARN WHILE YOU LEARN! JOIN OUR FREE LIVE TRADING SESSION!](       © All Rights Reserved, Trade Alliance [Unsubscribe]( | [Manage Preferences](