Software stocks got whacked in September. Here’s why they could tumble even further
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Software-as-a-service companies struggled to keep up with the market in September, and they might have even further to fall, according to RBC Capital Markets.
The average return in September for the 21 SaaS companies covered by RBC was -5.9%, while the S&P 500 index gained 1.7 per cent. RBC’s coverage universe includes Adobe, Salesforce, Dropbox, Microsoft, Oracle, Zoom, and other high-growth SaaS companies.
Sell-offs in 2015 and 2018 left the iShares Expanded Tech-Software ETF — which tracks a basket of software stocks — trading more than 20 per cent lower, and based on those previous routs RBC believes SaaS companies could fall another 25 per cent this year.
“On this comparative basis, it suggests we’re potentially only in the middle innings of a drawdown,” the firm said in a note to clients on Tuesday.
High-growth software companies covered by RBC dropped even further than the average, falling 14.9 per cent in September.
According to RBC, investors seem to be rotating into defensive stocks and sectors amid geopolitical uncertainty and concerns of corporate budget tightening.
SaaS business models can run into trouble when their corporate customers start to rein in spending because they’re less likely to invest in new technology.
RBC’s analysts also spoke with a number of Chief Information Officers and found that IT spending is likely to slow down in the coming quarters.
“CIOs are being asked to prepare budget scenarios in the event of a significant market correction where spending across the board would need to be reined in,” RBC added. “We believe this is illustrative of the macro uncertainty.”