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The best time to buy shares is when prices are low. But that’s easier said than done – when stocks are crashing it’s usually because investors are worried about the underlying business somehow.
That’s the case with software stocks at the moment. With valuation multiples at levels investors could only have dreamed of for the last decade I think there are some real opportunities to consider.
What’s the risk?
Right now, the concern with software is that artificial intelligence (AI) increases competition. And the danger is that this could force existing companies to compete on price, compressing margins.
The best thing about these businesses is their ability to keep increasing prices. But if that comes under threat, their shares will be worth a lot less than investors thought they were six months ago.
Importantly, though, the current software leaders aren’t defenceless. From a customer’s perspective, switching is complicated, difficult, and risky, so the savings need to be worth it.
Software stocks have been falling across the board recently. But I don’t think the threat is equal across all companies, which means there are potentially huge opportunities to consider right now.
Sage Group
FTSE 100 company Sage Group (LSE:SGE) provides accounting software for mid-sized enterprises. The stock is down 37% in the last 12 months, which suggests a big challenge – and there is one.
Anthropic has launched agentic plugins that threaten to do a lot of what the firm’s core product does. That’s an obvious risk, but there are a couple of things investors should note.
One is that the products aren’t the same – Sage’s Trust Label means the firm is prepared to stand behind its software’s outputs meeting industry compliance standards. Anthropic doesn’t do this.
Another is that Sage subscriptions account for around 1% of the average customer’s budget. That makes switching a lot of time and effort and a big risk for a small potential saving.
Guidewire Software
Guidewire Software (NYSE:GWRE) and I have history – I bought the stock in 2022, sold it in 2023, and regretted it ever since. But it’s 50% off its highs, so I might be about to get another chance.
The company provides software to the insurance industry and it’s been steadily signing up carriers for the last few years. And the reason it’s taken so long might actually be to its advantage.
The insurance industry is notoriously slow-moving. But that might well be to Guidewire’s advantage – it’s never lost a customer to a competitor because they generally don’t change unless they have to.
As a result, the chance to buy the stock after a sharp selloff could be a huge opportunity. So I’ll certainly be taking a closer look for my own portfolio in the next couple of weeks.
Time for action?
It’s easy to talk about being greedy when others are fearful or buying quality shares at bargain prices. But the reality is this is often harder than it looks.
Taking advantage of opportunities involves being ready to think about buying when it looks like there’s a threat – often an existential one – on the horizon.
That’s the case with Sage Group and Guidewire Software at the moment. But I think investors should see today’s prices as a chance to consider buying at unusually attractive valuations.
