00:00 Josh
Scott, it is great to see you. So let’s talk about this software sector, Scott. I mean if you look at the IGV, so your software ETF, uh, not good, Scott. It is well in the red already this year. Over the past year, it’s gone nowhere. What is the issue here, Scott? I mean, is this investors deciding that yes, you know what? AI is the death of software and I’m steering clear. Is that what’s going on?
00:37 Scott
I I think there is something to that, Josh. Good talking with you again, by the way. Um, so I I think there are a couple things and I think um some of those things are frankly largely related to AI. So you hit on one of them, which is AI as a disruptor, as a competitor. Um, and I think a good example of that might be an Adobe, right? Um, a great software company that was founded, I think in the 1980s, uh that is facing a lot of competition. and one of the competitive fronts is companies, and there are a lot of them and a lot of different offerings available to people at either free of charge or minimal charge where you’re able to use AI to create content, to create images, pictures, videos. Um, and people do wonder to what extent that will start eating into Adobe in terms of its revenue, in terms of its market share, in terms of its profitability and in terms of its growth. So I think that’s one way to think about it. And then the other way to think about it is the promise of AI that people have been investing for over the last two years or so hasn’t really come to fruition as quickly and as powerfully as people would like. and so I think investors are in fact growing impatient.
02:18 Josh
So I guess, Scott, I mean listen, what have what have investors been much more enthusiastic about the chips, right? So but to get more interested and excited about software, I would think you listen, if you could show folks real, meaningful AI monetization in that sector, that would draw people in. but I don’t know, Scott, when, you know, what is the the timeline for that? Is that, you know, is that 26? Do you think it’s 27? Is it 28?
02:59 Scott
Yeah, look, I mean your guess is as good as mine, but I think it’s fair to say that this is coming more slowly than a lot of people would like. and whether it’s, you know, the bell weather software companies out there or it’s frankly the investors in these companies, I think there is a lot of impatience and related uncertainty. You know, you think about a name like a salesforce.com, for example. I think a lot of people have looked at that company as kind of uh a bell weather when it comes to the cloud and a bell weather when it comes to AI. And the company definitely has talked about those super kind of trends over the last number of years. The problem is exactly what you highlighted. To what extent can they show that AI is already helping their business in a big way. And I think it’s hard to show at this point. and one of the reasons is that customers aren’t seeing the kinds of return on investment that they might have expected when they made these related investments. And I think that obviously is one of the issues that’s causing folks in the marketplace to press the pause button a little bit on related investment and spending.
04:47 Josh
So if I’m an investor, Scott, and I’m screening for opportunities in the software sector in your opinion, as beaten down as it is, what am I screaming for in your opinion?
05:04 Scott
So, look, I mean there are a couple things to keep in mind, right? Like I was looking earlier at uh the S&P 500 software industry index. and it was fascinating because if you look at it from April of last year into October, right? So really from when the Trump tariff announcement came out at the beginning of April, um, approaching and into earning season, um I guess for Q3, I mean, you saw an increase of 50% or so, a really dramatic jump after that decline in April, of course. But then since then, as you alluded to, I think that index has been down approaching 20%. And so I think there are a lot of people who are wondering, hey, have we bottomed out here? are the fundamentals going to improve? You look at a salesforce, the expectations um are for growth for maybe kind of 10% or more over the next few years. Yes, margins may improve and the valuation, look, if you compare it to the overall market doesn’t seem stretched, but I think people need kind of a positive catalyst and it’s really hard to determine what that might be, especially ahead of earnings. So when you’re thinking about TMT and technology more broadly, I think one of the best ways to think about this is where is there kind of secular growth and where is the consensus perhaps wrong. I mentioned Adobe a little earlier, they’re fighting a two-front war. They’re not only fighting against those businesses and apps that are letting um users use AI to create content, but also the Canvass of the world that are really making really sophisticated tools available, um, for essentially free. And so they’re fighting this battle and I think that’s kind of a challenge, but I think the company has made made a very good case that when it comes to companies, professionals, workflows, Adobe kind of owns that. So I think you got to kind of look at the fundamentals, where the secular growth is and kind of who has kind of the, I don’t know, the moats around their businesses that can kind of sustain the perceived and actual challenges from AI.
08:21 Josh
And finally, Scott, I’ll just get get you out of here on this. since listen, we’re talking here about the great AI trade and trend. I want to get your thoughts on this. just where we are, Scott, and where you’re think we could be headed. in the context, Scott, of this Taiwan semi report we got this week, where they say, listen, we’re expecting expenditures of of as much as $56 billion this year, right? They’re looking for revenue growth of close to 30% in 26. That was faster than what the street was estimating. I mean, you saw that report, you saw those headlines, Scott, what it suggests to you about the great AI trend and where we’re headed?
09:14 Scott
you know, it it’s phenomenal to think about this Josh, but um, semiconductors really as you alluded to earlier, um has been the place to be because it seems like the hyper scalers and countless other companies are doing everything they can to build out capacity and capability. We’ve done work indicating that there is a current super cycle when it comes to memory that will go well past this year. So there’s a lot of demand and frankly, companies seemingly aren’t going to be able to meet that. So I think there’s a lot of warranted um optimism around semiconductors, but as you touched upon, where the rubber meets the road is when you’re trying to roll out those applications and the benefits that those afford uh to your clients and your end users and it seems like uh there’s some squishiness there at best. So, people need to be selective, they need to look at fundamentals, but there is a lot of growth out there to be had. It’s just a matter of where to look for it.
Add Comment