The technology sector is currently undergoing big shifts, presenting both challenges and opportunities for investors. As the market transitions, savvy traders recognize this as a prime moment for value hunting. Recently, we’ve seen significant rotations within the tech sector—while some stocks are thriving, others are experiencing declines.
In particular, sectors like semiconductors, memory, and storage have been outperforming their peers, exhibiting robust growth. On the flip side, software stocks have taken quite a hit, raising questions for both investors and analysts. A glance at the State Street Technology Select Sector SPDR ETF (XLK) shows a relatively stagnant and downward-trending overall tech sector, indicative of the volatility currently plaguing software stocks.
Yet, amid this turbulence lies a silver lining—historical data suggests that steep sell-offs in tech often present excellent buying opportunities. Such moments have historically laid the groundwork for substantial rebounds, prompting many investors to consider positioning themselves for potential gains.
Let’s zoom in on the software segment to uncover specific trends. The iShares Expanded Tech-Software Sector ETF (IGV) serves as a representative proxy, revealing a more pronounced decline in software stock performance over recent months.
The numerous downward trends indicate heavy institutional outflows, with large investors offloading software stocks in considerable volumes. Despite this trend, several high-quality players continue to maintain solid fundamentals, suggesting potential investment opportunities.
For example, two companies standing out amid the chaos are Microsoft Corporation (MSFT) and Palantir Technologies, Inc. (PLTR). Both have experienced significant sell-offs recently, yet their fundamental health remains promising.
Microsoft’s selling trend has persisted since the previous year, yet key performance indicators remain robust, including:
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3-year sales growth rate: +12.5%
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3-year EPS growth rate: +12.6%
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Profit margin: +36.1%
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1-year EPS estimate: +15.1%
Source: FactSet
Similarly, Palantir has also faced heavy selling pressure, yet its fundamentals remain compelling:
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3-year sales growth rate: +33.9%
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3-year EPS growth rate: +172.1%
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Profit margin: +36.3%
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1-year EPS estimate: +42.2%
Source: FactSet
These firms could represent significant opportunities for investors looking to capitalize during this downturn. Historically, substantial technology sell-offs are rare, and the industry has shown resilience time and again. This suggests that the software sector may not be as defunct as some currently perceive.
To further exemplify the kind of quality enterprises undergoing price declines, let’s consider Salesforce, Inc. (CRM). This enterprise relationship management firm has suffered from institutional selling over nearly a year.
Despite this decline, Salesforce’s fundamentals remain astonishingly strong:
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3-year sales growth rate: +12.7%
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3-year EPS growth rate: +630.2%
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Profit margin: +16.4%
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1-year EPS estimate: +11.8%
Source: FactSet
Additionally, Salesforce initiated dividend payments in 2024 and has been progressively increasing its payout. With a low payout ratio of 22.2%, there’s room for further growth. The current forward yield stands at 0.73%, projecting an annual payout of $1.66 per share.
As a leading enterprise software company with strong fundamentals, involvement in AI, and a growing dividend, Salesforce offers an attractive investment proposition at its current discounted price. For long-term investors, these circumstances merit deeper exploration.
