Looks like AI’s back on the menu, boys!
We continue to see AI and AI supportive names starting to kind of take off. Veritiv Holdings (VRTV) is up 62%, obviously Micron Technology (MU) is up 32%, Semucap Equipment up a bunch.
But if you want to see whether this kind of AI narrative is going to continue, you get a pretty big hint as to what’s coming between Taiwan Semiconductor (TSM), which is almost a $2 trillion company, and ASML Holdings (ASML), which is worth now a real decent amount. I think it’s $580 billion.
That’s not new news. All my Turbo Income traders know that the AI narrative continues to be king.
But AI is killing software. Poster child for software, Microsoft (MSFT), was $542 on October 28th. It now sits at $390. IGV software ETF in October was up at almost 120. It sits at 80. These names have been crushed.
On the State of the Market this morning, I explained that the big sell-off in software was real. That’s not a mistake. It’s not a big overreaction. This is really a big difference between something that’s really working out there because of AI.
But it’s not all doom and gloom. There’s an interesting opportunity in development that I’m just about ready to trade.
The tricky part with software is it’s in the midst of a multi-year headwind. The software area is very much a kind of area of coding. So anything that kind of touches coding is now disruptable.
I always like to give the example of the London cab driver. Think of how amazing their IP was. Decades of knowledge. They’ve learned every street, every nook and cranny of the city. That is an incredible amount of skill that allows them to drive a cab. Suddenly, Uber comes in, GPS comes in, and now you can move to that city and instantly be a cab driver.
So you make something very easy for someone to do, and that makes it tough for the incumbent companies. Anybody can code now. The market is right to reprice it because we don’t know where the revenues are going to be, in many cases, in five years.
But some of these software companies are kind of moat-like to some degree. There are still some moats, and some of them are around regulatory barriers, compliance, infrastructure, data, sort of having tons of data. Like some of these companies have decades of data which you can’t replicate very easily or at all.
Think of this in three different tiers.
Category one: need to figure it out right now. The moat is shrinking.
Category two: stable moat. May have been oversold, but their moat is going to stay still.
Category three: the ones that can see an increasing TAM, or total addressable market – a widening moat.
Think of payroll, a company like Automatic Data Processing (ADP), it’s legal infrastructure. You get that wrong and you’re facing penalties, employee lawsuits. You’ve got an audit, a trail. You just can’t have some dude in the basement vibe code you a version that’s going to help your company.
Or even, you take something like ServiceNow (NOW), which Hans started adding to Monday. This is an operating system for that enterprise workflow that’s very ingrained. And ServiceNow is down like 70% since last April, since last May. It’s been absolutely torched.
For some companies, the moat could be even wider. What does AI do for CrowdStrike (CRWD)? We’re going to see cybersecurity problems and cybercrime and scamming and all this stuff on a level that we’ve never even imagined with these agentic swarms. So that in effect makes their TAM, their total addressable market, even bigger.
The irony of it all is that you have to understand software from the stock market’s perspective and from the narrative of, is software dead? Of course, it’s not dead. We’re going to see more software than we can shake a stick at. Software is absolutely going to be a thing. The question is, how does that work for the incumbents?
With the market at highs and software still near those lows, I’m going to guide you through picking out those names that are in file two that maybe got a little oversold, and into that category three, where there may be massive upside because their moat may expand.
Here for a good time AND a long time,
Hans Albrecht