A once-in-a-decade chance to buy software stocks?

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According to Michael Burry, it’s time to buy software stocks. The industry’s valuation relative to the S&P 500 hasn’t been this attractive in 10 years.

With prices falling even as earnings grow, which names are actually worth a look?

Risks and opportunities 

There are two threats weighing on software stocks right now. One is the risk of artificial intelligence (AI) disruption.

The other is private credit. The issue is that private equity firms have taken on a lot of debt to buy software companies.

Falling valuations make refinancing these loans harder. But the equity might not cover the outstanding debt.

That could make credit conditions tighter across the board. And this could include publicly traded software names.

According to CNBC, Burry has been buying several names in the industry. And two in particular stand out to me. 

Adobe

One is Adobe (NASDAQ:ADBE). I’m interested in this because it’s actually one of the names I’m avoiding. 

The firm’s balance sheet suggests there’s no problem with debt. But it’s the disruption risk that worries me.

Adobe is an example of a horizontal software firm. That means its products are used across a variety of industries. 

That’s a good thing in terms of a big target market. And a lot of potential customers can mean strong growth prospects. 

There is, however, a downside. Lower barriers to entry make it easier for a firm to build something that fits its specific needs.

That’s the AI disruption threat writ large. And Adobe is one of the stocks I’m wary of on those grounds.

Veeva

Veeva Systems (NYSE:VEEV) is different. It specialises in software for life sciences industries, which are highly regulated. 

That means switching isn’t just about finding a better product. Any alternative has to be officially validated as compliant.

It also means building a better product is just plain harder. Veeva’s software is designed specifically for the industry. 

Specialisation does bring risks. It means the firm is more exposed when the industry goes through tough times. 

This is been happening with Veeva in the US recently. And this is something investors need to take note of. 

In terms of AI, though, I don’t see a big disruption risk. And like Adobe, its balance sheet means debt shouldn’t be an issue.

Opportunity?

Software stocks haven’t been this cheap relative to the S&P 500 in the last 10 years. So the industry has to be worth a look. 

Investors buying Adobe shares should know they’re in good company. Michael Burry is a serious and sophisticated investor. 

By itself, though, that’s not a good enough reason to buy a stock. And I’m wary of the threat of AI disruption.

With Veeva Systems, my view is much more positive. I think the barriers to entry for AI competitors are much higher. 

Like Burry, I’m looking at more than one name in the industry. And Veeva is one of the names on my list right now.

The post A once-in-a-decade chance to buy software stocks? appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Adobe and Veeva Systems. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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