These 2 stocks getting unfairly slammed in the software sector rout are buys
Every weekday, the CNBC Investing Club with Jim Cramer releases the Homestretch — an actionable afternoon update, just in time for the last hour of trading on Wall Street. Stocks were pulling back sharply Thursday . (However, the S & P 500 and Nasdaq were off their worst levels of the session in late afternoon trading.) The biggest market story of the day has been the carnage in software. We have discussed the 12% decline in Microsoft shares — and how if management better allocates its compute resources toward Azure and not as much to other less proven initiatives, such as Copilot, it could see some better revenue growth numbers. Management said as much on the earnings call Wednesday evening, signaling that if the company had allocated all its GPUs that came online to Azure, year over year cloud revenue growth would have been 40% instead of the supply constrained 38% on a constant currency basis. If Azure printed 40%, we suspect the conversation would be much different. This earnings reaction should serve as a wake-up call to the team that they shouldn’t leave these cloud computing dollars on the table. The cloud potential is why we are sticking by Microsoft , and will potentially look to add to our position for the first time since August 2024 as shares settle down in the coming days. The software declines don’t end with Microsoft. The AI is eating software thesis is crushing enterprise software as a service (SaaS). ServiceNow dropped 12% despite generally better than expected results and a commitment to aggressively repurchase stock. The reaction to its quarter was bringing down Salesforce by roughly 7%. Also, German software company SAP reported Thursday morning, and its shares fell by a double-digit percentage after its cloud backlog increased less than expected. This selloff in software was a revaluation of what the market is willing to pay for SaaS companies, meaning price-to-earnings multiple ratios are compressing. Salesforce is one of the smallest positions in the portfolio, and we would not be running into this decline to buy. Not all software should be treated equally . Caught up in this software storm are the cybersecurity companies. Portfolio names CrowdStrike and Palo Alto Networks were down significantly, even though their business models face little disruption from advancements in AI. If anything, cybersecurity solutions will become even more important in the age of AI as bad actors grow increasingly sophisticated. A knock against CrowdStrike and Palo Alto Networks is that their stocks trade at high price-to-earnings multiples. That’s fair, but the stocks were acting like there’s disruption risk, and we don’t see it. With CrowdStrike down more than 6%, trading at about $438, we would be buyers of CrowdStrike if we were not restricted from trading it. We think Palo Alto’s weakness is an opportunity as well. The next major earnings report will be from Apple after the closing bell. We’ll be reviewing the numbers to determine iPhone demand, and we are interested in hearing what management has to say about margins amid rising memory costs as well as Gemini’s integration into Apple Intelligence. Other companies scheduled to report are market darlings SanDisk and Western Digital , as well as Deckers, and Stryker. Before Friday’s open, we’ll see earnings from American Express, Verizon, Chevron, Exxon Mobil, Sofi, Colgate Palmolive, and Air Products & Chemicals. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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