This year, U.S. stocks have really gone up, with the S&P 500 producing a 17.7% return and its IT sector producing a 34.2% return, both with dividends reinvested. But some tech companies have been left behind, which could be good for investors who want to find deals.
You probably already know that the S&P 500 SPX is based on market capitalization and has a lot of very concentrated stocks. The three biggest companies by this measure are now together making up 21% of the SPDR S&P 500 ETF Trust SPY. They are Microsoft Corp. MSFT, -1.44%, Apple Inc. AAPL, +0.38%, and Nvidia Corp. NVDA, +2.48%.
FactSet says that the S&P 500 software industry group, which is made up of 18 companies, has returned 18.8% so far this year. That’s better than the S&P 500 as a whole but a long way behind the tech firms. As of December 31, Microsoft had a very large share of this industry group (62%). From this point of view, Microsoft has contributed 15.2% of the total return for this industry group in 2024.
Based on a look at the 18 companies in the S&P 500 software group, eight have given back 15% or more this year. These include CrowdStrike Holdings Inc. (CRWD, -1.24%), which has given back 53%; Oracle Corp. ORCL, which has given back 39%; Fair Isaac Corp. FICO, which has given back 2.48%; and Microsoft, which has given back 24%.
This year, Salesforce Inc. CRM (-1.77%), down 2%, and Adobe Inc. ADBE (-1.63%), down 4%, have been the only two S&P 500 software companies to see their shares fall.
A bigger picture for stock plays on software rebound
The S&P 500, the S&P MidCap 400 Index MID, and the S&P Small Cap 600 Index SML make up the S&P Composite 1500 Index XX:SP1500. It gives us a longer list of software companies.
The S&P 1500 software industry group is made up of 46 companies. Of these, 39 are covered by at least five analysts polled by FactSet, and sales and earnings estimates are available through 2026.
This list has 39 companies. At least two-thirds of the analysts have given 18 of them a “buy” rating or something similar.
There are 95% of analysts who say “buy” on Microsoft, but the average price target is only 5% above Monday’s close.
The four companies at the top of the list have lost the most money so far this year. Over the next 12 months, all of them are likely to go up by more than 10%.
Shares of Salesforce fell 20% on May 30 to close at $218.01 after the company reported earnings and gave lower-than-expected growth guidance for subscription subscription revenue. The company kept its annual revenue forecast the same. In an interview with MarketWatch at the end of last month, Ken Laudan, portfolio manager of the Buffalo Large Cap Fund, said this was a mistake.
Laudan said that the drop in the price of Salesforce stock made him think about buying more of the company’s stock because he thought its sales would grow at a rate of 8% to 10% per year for the next five years. He said that the business would make “double digits” more per share.
Salesforce stock had gone up to $257.37 on Monday, only 5% lower than it had been at the end of the trading day on May 29 before the earnings report.
When Adobe reported its quarterly results on June 13, they were better than expected and turned around a year-to-date drop in its shares.
Brent Thill, an analyst at Jefferies, reiterated his “Buy” rating for Adobe on June 14. He set a price target of $700, which is 15% higher than the average price target for the stock. Adobe’s price hikes were a headwind in the first half of 2024, but they were turning into a tailwind, Thill wrote in a note to clients. He said that Adobe was “upselling customers to higher tiers with more AI.”
In contrast, the S&P 500 is predicted to have an EPS CAGR of 12.9% and a weighted sales CAGR of 5.7% over the next two years. We expect the S&P 500 software industry group to have a 14.2% sales CAGR and a 15.9% EPS CAGR over the next two years.
