Q2 ER Special Report 2: Software Slumps, CoreWeave's Q2, Micron’s Surprise
MNDY, TWLO, TEAM, NOW vs. PLTR, CoreWeave, plus Micron!
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As markets reach all-time highs, one sector is clearly not participating in the rally.
That is the software-as-a-service industry, dearly known as SaaS.
With the sector down some 12% YTD, as measured by WisdomTree Cloud Computing Fund WCLD 0.00%↑ since the beginning of the year, along with companies like Monday.com MNDY 0.00%↑, Atlassian TEAM 0.00%↑, and Twilio TWLO 0.00%↑ seeing significant declines in their share prices post earnings, it’s time for The Pragmatic Optimist to take a hard look at things.
Note, all our updated price targets, conviction scores, and ratings for all stocks under coverage can be found on the AI Stock Rec Tracker. 👇With that said, let’s dive into today’s post, which is divided into three sections.
An overview of what’s driving the recession in the SaaS sector with updated price targets of Palantir PLTR 0.00%↑, ServiceNow NOW 0.00%↑, Monday, Atlassian, Twilio and Salesforce CRM 0.00%↑
Earnings review and updated price target of CoreWeave
Revisiting Micron’s price targets after management revised Q4 guidance higher
Should You Buy Into The Software’s Slump?
It all started in 2022, when the AI Revolution began with the launch of ChatGPT.
In the first wave of the AI Revolution, it was all about laying out the data center infrastructure, where Nvidia’s NVDA 0.00%↑ GPUs came into play for training LLMs.
Now, as we enter the second wave of the AI Revolution, it is centered on organization-building applications with AI. In other words, we are not talking about running pilots on LLMs and building out dashboards anymore. We are looking at mass AI deployment and decision loops that close in seconds.
Clearly, Palantir has been a huge beneficiary in this phase.
Despite its jaw-dropping valuation of a forward price-to-earnings multiple of 300, the company continues to defy all forces of nature with its revenue now accelerating for 8 straight quarters.
Not only that, Palantir expects its revenue acceleration to continue into Q3 as well, while raising its full-year guidance once again that suggests FY25 revenue growth of above 45% YoY, more than 1600 basis points higher than the previous year, with its US Commercial revenue now projected to grow 85% YoY, as opposed to their previous guidance of 68%.
The thing is that today's market sentiment is inclined towards bidding up companies (regardless of valuation) that are proving themselves to hold a control point in the enterprise stack. However, it is disproportionately punishing those where it fears the possibility of product commoditization.
I am talking about companies like ServiceNow, Monday, Atlassian, Twilio, and Salesforce that have seen their earnings multiples contract drastically since the beginning of the year, despite little to no change in their forward earnings estimates.
In fact, not too long ago, investors would price the software-as-a-service sector on revenue multiples. Don’t forget the songs and tales sell-side analysts wrote praising the once predictable revenue streams of the subscription business model that became a beacon of hope for the software industry.
But, with fears of Agentic AI disrupting traditional SaaS business models and commoditizing their products, their growth story is being replaced by a margin story.
First, let me first admit by saying that the fears of Agentic AI disrupting SaaS are not completely misplaced. In a world where AI-native startups are shipping cheaper, faster-evolving tools at one end, while Amazon AMZN 0.00%↑, Alphabet GOOG 0.00%↑, Microsoft MSFT 0.00%↑ and Oracle ORCL 0.00%↑ embed AI into bundled ecosystems at the other, mid-market vendors are cornered into an uncomfortable spot.
However, with any recession, even if it is a sector-only recession, such as this one, there are often high-quality companies that go on steep discounts, presenting investors with long-term opportunities.
Second, should a business face risks of getting disrupted, we should see L2 metrics such as NRR (Net Retention Rate) and customer acquisition momentum fade.