Why We’re Not Throwing in the Towel on Software

We’re getting multiple questions about ServiceNow (NOW) , given the continued pressure on those shares, but also reflecting what we’re seeing in the larger software sector. We touched on that in our opening comments today, sharing comments from JPMorgan that line up with our view expressed last week that NOW and other software names are a show me story at least for the near-term.

We said NOW shares were likely to return to an oversold condition, and they have. We also said this:

"… for NOW shares to start working again, the company will need to further overcome the market’s concerns about generative AI. This means it will take at least another quarter of continued RPO growth with further gains for its AI-facing business.”

No question the news from Anthropic rattled the software cages further, but we are starting to see more calls not only that the drop in those names is overdone, but it's illogical.

That’s the word Nvidia (NVDA) CEO Jensen Huang used when talking at an AI conference hosted by Cisco (CSCO) Tuesday night. More specifically, he said the following:

"There's this notion that the tool in the software industry is in decline, and will be replaced by AI ... It is the most illogical thing in the world, and time will prove itself… If you were a human or robot, artificial, general robotics, would you use tools or reinvent tools? The answer, obviously, is to use tools...”

Now, we’re not ones to hang solely on the words of Jensen Huang, like some others out there. He is a pretty smart individual, we like to triangulate things. With that in mind, Advanced Micro Devices (AMD) CEO Lisa Su gave an interview Wednesday morning. When asked about what has unfolded in the software space, her response was similar to the ones we heard from Jensen, but she went on to say that AI tools would be integrated with development capabilities in order to harness the power of the tools to deliver better products.

Last week, alongside its better-than-expected earnings and increased RPOs, ServiceNow announced an expanded partnership with Anthropic to integrate Claude models more deeply into ServiceNow’s AI platform.

Remember the position that ServiceNow enjoys with its enterprise customers and their workflows. Let’s also remember some of the signals we shared late last year about hurdles to AI adoption in the enterprise — data silos were the single biggest inhibitor to scaling AI. That finding came from IBM (IBM) .

Databricks had a great description of what data silos are, and it explains the very problem in enterprise AI adoption:

"Data silos refer to this same separation of data within companies. Different teams often collect, manage, and store their data separately from one another, with access limited to those within certain groups. Sometimes the separation is designed around product units or job functions, but sometimes data silos are created through acquisitions."

That pain point explains why ServiceNow and the U.S. commercial business at Palantir (PLTR) are growing, and should continue to do so as AI adoption accelerates.

The key here is companies engaging with ServiceNow and others to harness the power of AI to deliver productivity gains, better information, and improved products/services. As we reflect on that, we can add Axon Enterprise (AXON) to that camp, especially given police-staffing shortages.

That means we should continue to see RPOs and related metrics, like Palantir’s total contract value, move higher in the coming quarters.

For now, however, the narrative that AI is eating the world is still driving the bus, but before too long, folks will come to realize the reality behind the comments above from Jensen Huang and Lisa Su.

That means there will come a time when we take advantage of the ongoing pressure we are feeling in several of the Pro Portfolio’s positions. And as painful as it may be, the degree to which these shares are oversold means it is not the time to throw in the towel:

Axon’s current RSI is 19.39 (remember and oversold condition begins when a stock’s RSI moves below 30).

Microsoft (MSFT) : 30.01

ServiceNow: 22.38

You may disagree with us, and we would be surprised if you are not frustrated. We certainly are with this latest bout of what we will describe as “react first, ask questions later.” But know this, the last thing we want is for you to abandon the shares only to regret it should a snap-back occur. When we’ve seen over-reactions like this in the past, it doesn’t take much for that to happen.

As far as our panic points on these stocks go, remember, they are not hard levels like stop losses, but levels at which we closely scrutinize the business. As we saw at both ServiceNow, Microsoft, and Palantir, their RPOs, backlogs, and the like all moved higher in the December quarter. That, coupled with the oversold condition, at a minimum, means we do not want to abandon ship, given the potential for a positive development to lift those shares.

Based on the increased total contract value and growth in that for the commercial business, we are keeping our PLTR price target at $220. The post-earnings reaction is supportive, with others lifting their PLTR targets, including Citi taking its to $260.

Signposts we will continue to track include comments about AI adoption and usage from companies reporting over the next few weeks. As we move into the second half of February and into March, we will see the next wave of investor conferences, including the Morgan Stanley Technology, Media and Telecom Conference that should see many hardware and software companies presenting. Given where that conference and others land in the current quarter will be a key time to assess not only the current quarter but also comments about consumer engagement, program wins, and the trend in RPOs and backlog.

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At the time of publication, TheStreet Pro Portfolio was long NOW, MSFT, PLTR, NVDA and AXON.