Global software stocks, which had been suppressed this year by fears of artificial intelligence (AI) disruption and concentration in semiconductors, are showing signs of a rebound. As concerns about AI replacing software and weak revenues were dispelled by solid first-quarter earnings, the perception is spreading that software companies are undervalued compared with the broader market, which has surged sharply.
According to the financial investment industry on Wednesday, the iShares Expanded Tech-Software Sector ETF (IGV), a leading U.S. software exchange-traded fund, posted a year-to-date return of -11.47% but rebounded 12.86% over the past month. In the Korean market, the FnGuide Software Index recorded an annual return of -3.02% but climbed 8.09% over the past month.
The key driver of the rebound is earnings. The market had initially been weighed down by concerns that massive AI infrastructure investments would erode profitability, compounded by fears that existing software would be replaced by AI. However, leading software companies, including Microsoft and Palantir, recently released strong earnings that exceeded market expectations, easing those concerns. Microsoft reported first-quarter revenue of $82.89 billion and earnings per share (EPS) of $4.27 on April 29 local time, both surpassing market estimates of $81.4 billion in revenue and $4.04 EPS. On Monday, Palantir also posted first-quarter revenue of $1.63 billion, an 85% jump from the same period a year earlier, along with EPS of $0.33, beating the consensus estimate of $0.28.
Share prices are responding in turn. Microsoft posted a disappointing year-to-date return of -11.00% through Wednesday but has risen 12.45% over the past month. Palantir's cumulative return this year stands at -18.35%, though losses narrowed to -2.63% over the past month.
In a report released Wednesday, Daishin Securities said, "Following power equipment and secondary batteries in April, software stocks are attractive as an undervalued sector relative to earnings, with valuations near historical lows."
