The Software Slowdown Is Here: Here’s How Investors Can Deal With It (NASDAQ:APPN)

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Khanchit Khirisutchalual

Tech stocks have borne the brunt of selling in 2022 as investors worry about issues such as rising interest rates, geopolitical upheaval, inflation and further rising prices. But now investment firm Morgan Stanley said they’re seeing the “first.” signs of moderation” for software.

A group of analysts led by Sanjit Singh noted that the demand picture was healthy at the start of the second quarter. But that wasn’t always the case throughout the quarter.

“Heading for [second-quarter] As a result, our channel talks have picked up signals of slowing demand across the sector,” Morgan analysts wrote. Singh’s team said that view is consistent with their most recent chief information officer survey, which pointed to modest expected growth in software budgets for 2022, the downturn is likely to be moderate compared to the first quarter, and the environment remains “fairly solid.”

However, analysts downgraded several software companies, including Digital Ocean (DOCN), Fastly (FSLY) and New Relic (NEWR), noting that stocks like Appian (NASDAQ:APPN), JFrog (NASDAQ: FROG) and Alteryx (AYX) have “better setups”.

Additionally, the company remains bullish on the long-term prospects for Datadog (NASDAQ:DDOG) and Atlassians (NASDAQ:TEAM).

“With increasing signs that the slowdown is starting to materialize, we think the tactical playbook for investors is on its way [the second quarter] prefers companies that primarily sell to larger companies and operate subscription pricing models,” said the Morgan analysts, who also highlighted opportunities for companies specializing in multi-year contracts such as ServiceNow (NOW), Alteryx (AYX), Appian ( APPN) and JFrog (FROG).

Morgan Stanley added that companies operating consumption-based models with mixed track records and outsized risks are viewed as less favorable, hence the downgrades to Fastly (FSLY), Digital Ocean (DOCN) and New Relic (NEWR).

The analysts noted that company managers need to find a way to tell investors about a potential slowdown, but still show their companies are strong.

Those considered to be “best positioned for success” in the second half of the year are likely to be those who can demonstrate solid fundamentals with no signs of increased competition or pricing pressures, take into account a weaker spending environment in the second half of the second half and provide guidance, which do not show that “growth is not correcting sharply and that the model is not materially deleveraging.”

Companies like MongoDB (MDB), Salesforce (CRM), and Domo (DOMO) have recently demonstrated these tactics, and the analysts noted that Datadog (DDOG), JFrog (FROG), and Alteryx (AYX) are the best-equipped to “… to deliver such a narrative”.

Last month, Goldman Sachs upgraded shares of Atlassian (TEAM), noting that they are increasingly bullish as the company hits a “crucial moment” in its cloud journey.

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