Public software companies have taken a beating in recent months, says Steve Koenig, pointing out opportunity in the valuation resets for stocks in the sector. He considers AI a &quot;disruptive force&quot; but not to all software companies. Cybersecurity is one corner of the software suite he sees benefitting from the AI boom, calling Zscaler (ZS) a well-positioned company. Tom White offers an example options trade for Zscaler. ======== Schwab Network ======== Empowering every investor and trader, every market day. Options involve risks and are not suitable for all investors. Before trading, read the Options Disclosure Document. http://bit.ly/2v9tH6D Subscribe to the Market Minute newsletter - https://schwabnetwork.com/subscribe Download the iOS app - https://apps.apple.com/us/app/schwab-network/id1460719185 Download the Amazon Fire Tv App - https://www.amazon.com/TD-Ameritrade-Network/dp/B07KRD76C7 Watch on Sling - https://watch.sling.com/1/asset/191928615bd8d47686f94682aefaa007/watch Watch on Vizio - https://www.vizio.com/en/watchfreeplus-explore Watch on DistroTV - https://www.distro.tv/live/schwab-network/ Follow us on X – https://twitter.com/schwabnetwork Follow us on Facebook – https://www.facebook.com/schwabnetwork Follow us on LinkedIn - https://www.linkedin.com/company/schwab-network/ About Schwab Network - https://schwabnetwork.com/about

Koenig: Software Valuation Reset Offers Opportunity, ZS Strong in Cybersecurity

Schwab Network

# Full Transcript

**Podcast:** Schwab Network

## Participants

- **Tom White** (Fast Market)
- **Steve Koenig** (Macquarie)

## Transcript

We're back on Morning Trade Live. We're looking at some software names this morning. We're looking at Salesforce, ServiceNow, Zscaler, Datadog. Most of them are higher. ServiceNow is down 1.1. But it's interesting actually if you look across the software space, it had been up yesterday when chips were down. We're starting to see a couple of these names losing a little bit of steam as chips are actually picking up in the session. So obviously this game of ping pong as we see between the hardware and the softwares continues.

Right now. But all in all, it does look like investors have been engaging a lot more with softwares of late, particularly since the initial AI disruption fears, which really pulled the rug from underneath a lot of these stocks in this sector. So let's go inside out on the space and joining us now is Steve Koenig, who's the US Head of Software and Research Services Research, excuse me, over at Macquarie. Steve, always nice of you to join us. Thank you so much for your time. So as I mentioned, we have seen investors kind of wrapping their arms around the world.

around software a little bit more recently as we've seen that rotation. Stock prices seemingly have recovered. Obviously, we've got some pretty good earnings out of some of these companies. But what about valuations? Have we seen recovery there too? Good morning, Sam. Yeah, thanks for having me. Yeah, for the public software companies, as opposed to our, we maintain a list of the top 80 AI disruptors.

The public incumbent software companies, you know, valuations are down. The aggregate valuation of our 40 company growth software index is down like almost 30% since peaking last October. A lot of that was in January, but it was a continual, you know, it was a pretty constant drawdown. Trading action. Trading action. I should say pricing in general valuations have stabilized roughly since May, but there has been some choppy trading action, as you just pointed out.

Valuations for, again, we look at our top, our 40 company public software index is a good proxy here for the space. And those valuations are down significantly, you know, around 6.7 times enterprise value to forward revenue. And that's, you know, kind of these stocks trade on average, typically historically around nine times.

So you're looking at some pretty interesting valuations here, coupled with fundamental performance, you know, in our, in that 40 company index, you know, once again, this, this most recent quarter, the March and April quarter, just like the prior quarter, the majority of those 40 companies were seeing their revenue run rates accelerate as opposed to decelerate. So performance seems so fine, you know, AI disruption fears aside.

Okay. But have the business fundamentals, as you mentioned, which have looked pretty solid, as you have seen a lot of these ...

Koenig: Software Valuation Reset Offers Opportunity, ZS Strong in Cybersecurity

Transcript

Built for investment professionals

Every day you wait, your competitors are finding
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Koenig: Software Valuation Reset Offers Opportunity, ZS Strong in Cybersecurity

Transcript

Built for investment professionals

Every day you wait, your competitors are findingedge in conversations you're not hearing.

Every day you wait, your competitors are finding
edge in conversations you're not hearing.