One of the widely discussed results of growth and technology stocks faltering this year is that some growth- and tech-heavy industries are now chock full of previously richly valued stocks that are sporting more attractive multiples.
Software is one of the prime examples of this, and for investors who don’t want to stock pick, some exchange traded funds are relevant on this front. Those include the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM).
Both ETFs follow the Nasdaq-100 Index (NDX), and each allocates 50.11% to technology stocks. Within that group are an array of software equities, some of which are more attractively valued today than they have been in multiple quarters.
“While the ride can be stomach churning, we initiate coverage today remembering that even the scariest roller coasters pull up, if they are well-built,” wrote Bernstein analyst Peter Weed in a note to clients Tuesday. “Cloud SaaS’ wild ride appears to be nearer to a bottom relative to historical markers, including evidence of strong fundamentals vs. investors’ desire: a growing cash engine.”
Among the software stocks the Bernstein analyst is constructive on are Atlassian Corp PLC (NASDAQ:TEAM) and Datadog (NASDAQ:DDOG), both of which are components in QQQ and QQQM. Weed is also bullish on ServiceNow (NYSE:NOW), but that stock isn’t in the QQQ and QQQM portfolios.
“NOW and TEAM (Outperform) are ‘value’ stories in our growth sector – long-term strong track records that we anticipate will continue, each with one performance aspect underappreciated by the street,” noted the Bernstein analyst.
In what could prove to be good news for investors holding QQQ and QQQM, Datadog is Bernstein’s top pick in the software space.
“Weed named Datadog the firm’s top pick in the sector given its strong CAGR, pre-pandemic growth rates and growing total addressable market. He expects revenue to expand as the company launches projects inhibited by Covid-19 and customers grow as the shift to IT cloud gains steam,” reported Samantha Subin for CNBC.
The Bernstein analyst has a $172 price target on Datadog, implying significant upside from the July 20 close of $100.88.
Potentially adding to the allure of QQQ and QQQM as plays on compelling valuations in the software industry is the point that it’s not just cloud stocks sporting lower multiples. The same is true of some cybersecurity stocks, some of which reside in the Invesco ETFs.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
