It’s hard to find a space with more “victims” of the artificial intelligence (AI) disruption trade than software. That weakness is permeating multiple sub-segments, including cloud computing, cybersecurity and more.
The recent slide endured by software equities, some of which reside in the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM), is alarming to some investors and shouldn’t be ignored. However, some market observers believe the punishment is an overreaction. In fact, some experts argue that recent software calamity is depressing valuations. That potentially opens the door to buying opportunities in the group.
If that holds true, QQQ and QQQM are credible ways to play that scenario for simple reasons. The ETFs hold multiple software equities and there’s no telling which ones of those stocks will lead or lag in a rebound scenario.
QQQ May Be Fine Software Rebound Idea
While currently of little solace to investors, some of the recently tumbled software stocks, including QQQ/QQQM components, sport quality attributes.
“Across industries, Morningstar analysts say the knee-jerk reactions are short-sighted. In many cases, they do not see credible threats to the firms they cover from AI,” noted Morningstar analyst Sarah Hansen. “On the contrary, in some cases, they expect the technology to help bolster growth. Here’s what investors need to know about the sectors impacted by the ‘AI scare trade.’”
A software rebound would likely benefit some QQQ/QQQM member firms. Bolstering the case for such a rebound, fundamentals in the group remain broadly solid.
“Our analysts say that for the most part, fundamentals in the software industry look solid and AI does not pose a meaningful threat to license sales or seat counts (at least for now),” added Hansen.
Sturdy fundamentals don’t always supersede near-term headline risk. That underscores the utility of QQQ and QQQM at a time when stock-picking in the software arena could be risky. Markets can stay irrational longer than some investors can stay solvent. Thus, investors venturing into the software realm today need strong stomachs. QQQ and QQQM can ease some of that burden.
“Analysts say the takeaway for investors is two-pronged. In some cases, skepticism surrounding firms whose business models are actually at risk is warranted,” said Hansen. She concluded, “In other cases, the market’s eagerness to derisk may result in some proverbial babies being thrown out with the bathwater—i.e. opportunities to pick up quality companies at a steep discount. In some cases, they even expect AI to enhance the business models for these affected firms, rather than render them redundant.”
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