Are Mid-Cap Software Stocks Good Value Post The Tech Rout?

Our theme of Mid-Cap SaaS stocks has fallen by about 42% year-to-date, underperforming the broader Nasdaq-100, which remains down by roughly 33% over the same period. The initial leg of the sell-off in software stocks was driven by investors adjusting their allocations and valuations of stocks to account for the Federal Reserve’s monetary tightening – the benchmark federal funds rate now stands at over 3%, from just about 0.25% at the beginning of this year. We’ve now reached a point where earnings growth for major software players is beginning to look a bit vulnerable, considering rising inflation, a softening economy, and the easing of the Covid-19 era demand tailwinds for technology products. This is putting further pressure on stock prices within the sector.

So what’s the outlook like for the theme? Now, the macro environment remains tough with U.S. GDP contracting over the last two consecutive quarters and the Fed indicating that it would continue with its rate hikes as it looks to bring high inflation in check. While this environment typically doesn’t bode well for high-multiple stocks and mid-cap names, we think a lot of the pain is already priced in given the length of the current bear market (almost nine months) and the extent of the drawdowns.

We think that the theme could remain a reasonably strong bet for the long term. 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. Moreover, businesses are also likely to continue to invest in greater automation and software tools to mitigate the impacts of a tight labor market and elevated wages. This should help the stocks in our theme, given that they provide somewhat niche, yet established software and services.

Within our theme, Okta stock (NASDAQ:OKTA), an identity and access management player, has been the worst performer, declining by about 75% year-to-date. On the other site, Alteryx stock (NYSE:AYX), a data science and analytics software provider,  has been one of the better performers, declining by just about 10% year-to-date.

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 10/2/2022
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market Beating Portfolios

See all Trefis Price Estimates