With The Nasdaq Down 25%, Should You Consider Smaller Software Stocks?

Our theme of Mid-Cap Software Stocks, which includes software players that have a market cap of between $2 billion and $10 billion, and have grown their revenues by at least 50% over the last two years, has underperformed considerably. The theme remains down by about 35% year-to-date in 2022, following a tough 2021, which saw the theme decline by about 12%. In comparison, the S&P 500 remains down by 16% year-to-date, with the Nasdaq-100 remaining down by around 24%. With U.S. inflation surging and the Federal Reserve raising interest rates at a faster than anticipated pace, investors have been moving out of high-growth, high-multiple stocks. Moreover, the tailwinds that software companies saw from the remote working trend earlier in the pandemic are likely cooling off, with employees returning to the office.

So what’s the outlook like for the theme? Interest rates are likely to rise further in the coming months, with the Fed indicating that 0.5% hikes were a possibility in June and July. This could continue to impact high-multiple tech stocks and mid-cap software names, many of which remain loss making. However, these stocks remain a good bet for the long-term for a couple of reasons. Overall spending on software is likely to remain robust driven by greater digitization of business and also the broader pivot of the software industry into the cloud and to more recurring revenue models.  This should help the stocks in our theme, given that they primarily focus on specialized software tools.

Within our theme, Asana stock (NYSE:ASAN), a company that sells mobile work management platforms, has been the weakest performer, declining by about 69% year-to-date. On the other side, Anaplan stock (NYSE:PLAN), a company that provides cloud-based enterprise planning solutions, has been the best performer, with its stock rising by about 40% this year, following its deal to be bought out by private equity firm Thoma Bravo.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 5/18/2022
[2] Cumulative total returns since the end of 2016

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