As AI Fears Hammer Software Stocks, I'm Going Bottom Fishing
In a market obsessed with AI disruption, this trade offers a smarter, lower‑risk way to play a potential software rebound.
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Fears of coming AI disruption continued to move through the markets like a low-grade hurricane this past week. The effects from this storm hit the wealth management, logistical/trucking and commercial real estate brokerage spaces. Given how fast trading moves these days, I would not be surprised if other areas of the market are hit by the daily ebb and flow of these fears in the coming weeks.
I have doubts that the roughly $700 billion in capex to be spent in 2026 by the four major hyperscalers will generate adequate ROI to justify these massive sums. However, I do believe that that AI will eventually transform many industries. The question is whether these changes happen over the next 12-24 months or over a significantly longer time frame.
The AI revolution should significantly boost U.S. productivity — and should, over time, bring down inflation levels, all things being equal. Also, given a shrinking birth rate and reversal of migration flows, this is likely necessary for the U.S. economy to grow at a decent pace and not become like Europe.
Few industries have taken it on the chin from growing worries around AI disruption more than the software sector. Even before the "SaaSpocalypse" early this month, the industry was on its back foot in the market performance wise.
With the continued declines in February, despite a decent rebound Friday, the software sector is trading at its lowest collective P/E ratio since 2014. The contrarian in me feels this might be the start of a buying opportunity.
I do expect AI to change the way the industry does business and eliminate many software programming jobs over time, especially entry level positions. That said, I still think I will continue to have to pay the monthly fees for my Microsoft Office 365, Norton virus protection, and a variety of other software services, at least for the foreseeable future. Most software standard bearers will integrate AI into their product offerings and operational processes, which should produce significant efficiencies.
I don’t do a whole lot of investing in the technology sector, preferring my biotech and small-cap holdings, spaces where I have much more expertise. That said, there appears to be a buying opportunity here.
The easiest way for me to act upon that potential opportunity right now is by targeting an ETF such as the iShares Expanded Tech-Software Sector ETF (IGV) . This provides wide diversification across the industry and eliminates company specific risk.
By employing covered call orders, I can either engineer a lower entry point or pick up a decent return with my trade. Options against this ETF are very liquid as well.
The top holdings of this ETF include well-known names such as Microsoft (MSFT) , Oracle (ORCL) and Salesforce (CRM) , all of which are expanding their footprint in the emerging AI space, it should be noted.
Here is how I opened an initial position in this ETF on Friday to close out the trading week:
Option Strategy
This is how one can initiate a holding in IGV via covered call orders. As a reminder, covered-call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the August $80.00 call strikes, fashion a covered call order with a net debit in the $72.60 to $72.80 a share range (net stock price - option premium).
This strategy provides downside protection of 12% with upside potential of 10% over the option duration even if the stock trades down slightly.
At the time of publication, Jensen was long IGV.
