It’s hard to find a space with more ‘victims’ of the artificial intelligence (AI) disrupting commerce than software. This weakness permeates multiple sub-segments, including cloud computing, cybersecurity, and more.
The recent declines in software stocks, including some in the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM), are alarming to some investors and should not be ignored. However, some market observers believe the punishment is an overreaction. Some experts even argue that recent software disasters are depressing valuations. That may open the door to purchasing opportunities in the group.
If that’s true, then QQQ and QQQM are credible ways to play that scenario for simple reasons. The ETFs contain multiple software stocks and there is no telling which of these stocks will lead or lag in a rebound scenario.
QQQ can be a good software rebound idea
While offering little relief for investors right now, some of the recently plummeting software stocks, including QQQ/QQQM components, are still quality features.
“Across industries, Morningstar analysts say the knee-jerk reactions are shortsighted. In many cases, they see no credible threats from AI to the companies they watch,” said Morningstar analyst Sarah Hansen. “On the contrary, in some cases they expect the technology to help fuel growth. Here’s what investors need to know about the sectors hit by the ‘AI fear trade.’”
A software fix would likely benefit some QQQ/QQQM member firms. What strengthens the case for such a recovery is that the fundamentals within the group remain generally solid.
“Our analysts say that for the most part, the fundamentals in the software industry look solid and that AI does not pose a meaningful threat to license sales or license counts (at least for now),” Hansen said.
Solid fundamentals are not always more important than overall short-term risk. That underlines the usefulness of QQQ and QQQM at a time when software stock picking can be risky. Markets can remain irrational longer than some investors can remain solvent. Investors entering the software world today therefore need a strong stomach. QQQ and QQQM can alleviate some of that burden.
“Analysts say the message for investors is twofold. In some cases, skepticism about companies whose business models are actually at risk is justified,” Hansen said. She concluded: “In other cases, the market’s willingness to reduce risk may lead to some proverbial babies being thrown out with the bathwater, i.e. opportunities to acquire quality companies at a steep discount. In some cases, they even expect AI to improve the business models for these affected companies, rather than making them obsolete.”
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