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 seen a bit of a recovery in recent weeks gaining close to 10% since early July, although it still remains down by about 31% year-to-date. There are a couple of factors driving the recent recovery. Investors have been increasing exposure to tech stocks in recent weeks, following better-than-expected earnings reports from big tech players such as Alphabet and Microsoft. Moreover, there might be macro factors at play, as well. U.S. GDP has contracted over the last two quarters and energy and commodity prices are showing signs of cooling. This could possibly mean that inflation, which has roiled tech stocks and resulted in aggressive rate hikes by the Federal Reserve could ease off a bit. We should get more clarity on this with U.S. inflation numbers expected this week.
So what’s the outlook like for the theme? Near-term macro issues notwithstanding, we still think the theme is a reasonably strong 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 due to the broader pivot of the software industry into the cloud and to more stable, recurring revenue models. Gartner projects that global software spending is likely to grow 9.6% to about $807 billion, despite the fact that broader IT spending is likely to rise by just about 3%. This should help the stocks in our theme, given that they provide somewhat niche, yet established, software and services.
Within our theme Dropbox stock (NASDAQ:DBX) is the largest stock in terms of valuation, with a market cap of about $9 billion. The stock has declined by about 2% year-to-date. Asana stock (NYSE:ASAN), a company that sells mobile work management platforms, is the fastest-growing company, with its revenue over the last 12 months rising 83%. Veeva Systems stock (NYSE:VEEV) is one of the most profitable stocks in our theme, with operating margins standing at about 26% over the last 12 months.
|S&P 500 Return||0%||-14%||84%|
|Trefis Multi-Strategy Portfolio||1%||-13%||245%|
 Month-to-date and year-to-date as of 8/9/2022
 Cumulative total returns since the end of 2016