Software stocks continue to rise in trend.

Last Updated: 9. Februar 2024By

Strong quarterly figures and intact growth prospects continue to drive software stock prices higher. The industry index Dow Jones U.S. Software Index (DJUSSW) rose by 82% year-on-year, leaving the stock market far behind. In the same period, the S&P 500 index gained 31%. The top performer on my watchlist was Salesforce with a 138% increase, followed by Adobe with 94%.

In Europe, software stocks also remain clearly on an upward trend. SAP gained 58% year-on-year, more than double the EURO STOXX 50 index (+25%). The top performer in the stock analysis was Sage Group with a value increase of 74%.

Good prospects thanks to cloud and artificial intelligence The transformation of the business model from selling licenses to a subscription model via the internet (cloud computing) has clearly been successful for the industry. After the initial high investments, companies are now able to exercise cost discipline again thanks to high growth rates with cloud services and reap the fruits of their work. In addition, artificial intelligence (AI) is proving to be a new growth driver with groundbreaking innovations.

By using AI, customers can save working time and thus reduce personnel costs. This is especially beneficial in times of high cost pressure and personnel shortages. Considering that AI is still in the early stages of development, the growth potential seems far from exhausted.

SAP forges ahead with new AI assistant The German industry leader SAP has high hopes for AI. SAP’s new AI assistant Joule is available in the cloud applications in the form of a chat window and allows users to, for example, have job advertisements formulated or collect precise information without having to click through menus. Employees can simply ask a question or formulate a problem to be solved using voice commands and receive the appropriate answers based on business data from SAP’s portfolio as well as from third-party sources.

The new generation of AI is expected to „fundamentally change how people work with our software,“ said CEO Christian Klein. SAP should be on your watchlist.

Further potential for stock prices Based on stock valuations, software stocks are not yet too expensive. The price-to-cash-flow ratio (P/CF) of companies mostly falls within a range of 20 to 30, which indicates neither a historical nor a good earnings potential overvaluation.

This means that the stocks are not valued as classic growth stocks with very high P/CF ratios, but as growth at a reasonable price. In some companies, valuation indicators even decrease due to strong growth. I expect that growth will continue to drive stock prices higher.

Although software companies are not immune to economic disruptions, we expect that the increasing cost-saving opportunities for customers through digitalization processes and AI will allow companies to continue to grow even in difficult times.