Microsoft (MSFT) is considered a high-conviction buy and a "gift" at current levels due to its strong position in monetizing AI through its Azure cloud and Copilot products. While the broader software sector faces headwinds, consider innovators like HubSpot (HUBS), which is also a potential acquisition target, or key data platforms like MongoDB (MDB) that enable the AI revolution. For a potentially safer investment in the AI theme, look to established companies like Walmart (WMT) that are using technology to drive efficiency and margin growth. Investors should be cautious with Oracle (ORCL) due to execution risks tied to its large OpenAI contract. Finally, it may be best to wait for signs of renewed innovation before investing in Salesforce (CRM), as it currently appears to be a potential value trap.

Software Sector (SaaS)

• The enterprise software sector is experiencing a "bloodbath," with the IGV (iShares Expanded Tech-Software Sector ETF) seeing its largest drawdown since the global financial crisis.
• The sell-off is broad, with very few software companies being spared. Specific examples of year-to-date declines mentioned include:
  • Oracle (ORCL): down 20%
  • Salesforce (CRM): down 26%
  • Adobe (ADBE): down 22%
  • Workday (WDAY): down 25%
  • ServiceNow (NOW): down nearly 30%
• The primary driver of this negativity is the narrative that AI is the death of software. This creates "terminal value risk," meaning investors are questioning the long-term viability and growth prospects of these companies.
• The fear is that new AI models and tools from companies like OpenAI and Anthropic will make existing software obsolete, destroy their competitive advantages ("moats"), and allow anyone to build applications without traditional coding.
• The sentiment is described as the most negative it has been in the guest's entire career, potentially worse than during the 2008 financial crisis.

Takeaways

• The market is pricing in a worst-case scenario for many software stocks, viewing AI as an existential threat. This is described as a "baby with the bathwater" moment.
• This environment may present opportunities for investors who can differentiate between companies that are truly at risk and those that can adapt and leverage AI as a competitive advantage.
• The risk is not about near-term earnings (which are often still growing) but about the long-term future of the companies' business models, making it a difficult environment to invest in without a strong, company-specific conviction.

Microsoft (MSFT)

• The guest is very bullish on Microsoft, calling it his "favorite name" and viewing the stock at current levels as "a gift."
• Microsoft is seen as uniquely positioned to benefit from AI due to its cloud platform Azure and its portfolio of applications.
• The company is seeing real adoption and monetization of its AI products, even outside of Azure:
  • GitHub Copilot: Paid user numbers hit a record high despite intense competition.
  • Microsoft 365 Copilot: Reached a record 15 million paid users. While this is a small fraction of the 400 million total Office 365 users, it shows significant early traction with massive room for growth.
• A key competitive advantage is Microsoft's model-agnostic approach. Products like GitHub Copilot are built to work with various AI models (from OpenAI, Anthropic, open-source, etc.), not just one. This allows them to offer the best tool for any given task.
• The stock is considered attractively valued, trading at 21.5 times forward GAAP earnings while consensus expects durable mid-teens earnings and sales growth. This is seen as a very reasonable price for a high-quality company with strong growth drivers.

Takeaways

• Microsoft is presented as a high-conviction buy. It is successfully turning AI into a real business and has a clear path to accelerating growth.
• Investors should look past short-term market jitters (like the slight miss on the Azure growth "whisper number") and focus on the long-term opportunity.
• The current valuation offers an attractive entry point for a company that is a primary beneficiary of the AI revolution, unlike many of its software peers that are seen as potential victims.

Salesforce (CRM)

• The sentiment on Salesforce is cautious and described as being in "wait and see mode."
• The stock's massive run-up in 2024 was fueled by hype around its AI products like Agent Force, but that excitement has faded, and the stock has fallen dramatically from its highs.
• The core concern is a perceived lack of a strong "culture of innovation" compared to its early days. This puts it at risk of being disrupted by more nimble, AI-native companies.
• The stock is trading at a historically low valuation of 14.5 times forward earnings for projected 10-11% growth. This cheapness reflects the market's "terminal value risk" fears—the concern that growth will eventually slow to low-single-digits or even turn negative.
• M&A (Mergers & Acquisitions) is mentioned as a potential "lifeline" to acquire AI talent and technology, but it would be very expensive given the high valuations of private AI startups.

Takeaways

• Salesforce is a classic "value trap" debate. The stock looks cheap on paper, but it faces significant fundamental risks from AI disruption.
• A turnaround for the stock depends on the company's ability to innovate and prove it can generate meaningful growth from its AI products. Without that, the stock may continue to underperform.
• This is a high-risk, high-reward situation. Investors should wait for concrete signs of accelerating organic growth before considering an investment.

Oracle (ORCL)

• The guest is "fearful on Oracle," expressing a bearish view.
• The stock's massive rally earlier in the year was driven by hype around a large cloud contract with OpenAI. This is now viewed as a sign of a market top for the stock.
• Investors are now questioning the economics of the OpenAI deal, specifically:
  • How Oracle will afford the massive capital expenditures required to build out the infrastructure.
  • What the profit margins on the deal will actually be, especially since they likely had to compete aggressively on price.
• The feeling is that Oracle "bit off more than they could chew," and its fortunes are now uncomfortably tied to the success and financial health of OpenAI.

Takeaways

• Investors should be extremely cautious with Oracle. The initial AI hype has given way to serious questions about financial viability and execution risk.
• The stock's performance is heavily dependent on the OpenAI contract, which introduces a significant external risk factor. If OpenAI faces challenges, Oracle's stock is likely to suffer disproportionately.

Other Software & AI Opportunities

• Beyond Microsoft, the guest highlighted several other software companies that are well-positioned to benefit from AI.
• HubSpot (HUBS):
  • Viewed as a company with strong innovation in AI that directly competes with Salesforce.
  • Noted for its ability to grow its product suite organically rather than through large acquisitions.
  • Mentioned as a "fantastic acquisition target," with past interest from Google (GOOGL).
• Intuit (INTU): Has a significant opportunity to use AI to transform its core tax and accounting software businesses.
• MongoDB (MDB) & Snowflake (SNOW):
  • These data platform companies are seen as key "enablers" of the AI revolution.
  • AI applications require massive amounts of data, and these companies provide the infrastructure to store, manage, and process it, particularly unstructured data in the case of MongoDB.

Takeaways

• For investors looking for opportunities in the beaten-down software sector, these names are highlighted as having strong, AI-driven growth stories.
• Companies that provide the fundamental building blocks for AI (like data platforms) or are effectively integrating AI into their products (like HubSpot and Intuit) may be more resilient than peers.
• HubSpot could be an interesting investment as either a standalone innovator or a potential M&A target.

AI Adopters (Non-Tech Companies)

• A major theme is that the "real value" of AI may be captured by the companies using it, not just those creating it.
• Walmart (WMT) is used as a prime example. The company is successfully adopting AI across its business for logistics, advertising, and internal processes to drive margin expansion and efficiency.
• These established, non-tech companies can get the benefits of AI (cost savings, better revenue) without the "terminal value risk" that tech companies face from disruption.
• Enterprise AI adoption is broad-based across many sectors, including consumer, oil and gas, manufacturing, and healthcare.

Takeaways

• A potentially safer way to invest in the AI trend is to buy shares in high-quality, established companies in traditional industries that are effectively implementing AI.
• Look for companies like Walmart that are publicly discussing how AI is improving their operations and financial results. This strategy allows you to benefit from AI's productivity gains while avoiding the volatility and disruption risk of the core tech sector.