There is no doubt that software stocks are on fire, igniting new highs for the stock market. And if the valuations were untouchable a year ago, they are definitely too hot to handle now.
So is this a bubble, the last gasp of a market top?
I don't think so. Sure, a correction may be necessary to wring out the excesses of speculation and FOMO (fear-of-missing-out). And longer-term investors with triple-digit profits in their pockets will be keen to run to the bank.
But with solid economic fundamentals and momentum, there are few signs of this bull market ending in the next year. And if/when a correction comes, buying software innovators will still be a hot ticket.
That's because it's more true today than when Marc Andreessen said it seven years ago:
software is eating the world.
In a Wall Street Journal essay from August of 2011, the front half of the famous Silicon Valley VC firm Andreessen Horowitz explained
Why Software Is Eating The World. He opened the piece with this paragraph... This week, Hewlett-Packard (where I am on the board) announced that it is exploring jettisoning its struggling PC business in favor of investing more heavily in software, where it sees better potential for growth. Meanwhile, Google plans to buy up the cellphone handset maker Motorola Mobility. Both moves surprised the tech world. But both moves are also in line with a trend I've observed, one that makes me optimistic about the future growth of the American and world economies, despite the recent turmoil in the stock market.
The turmoil Marc is referring to would be the early August meltdown after Congress couldn't agree to raise the debt ceiling and dinged the credit rating of US Treasury bonds. The S&P dropped 5% in one day on August 4, 2011.
Artificial Intelligence Ushers a New Age for Software
In the video that accompanies this article, I show the recent surge in software names like
Square ( SQ - Free Report) , Salesforce, and Adobe, three unique companies that embed themselves in their customers' businesses with indispensable enterprise solutions.
And I compare the software group’s performance to that of broad indexes and the semiconductors using the terrific tools on StockCharts.com, where you can see comparisons of indexes, sectors, industries, and stocks in almost any time frame.
I also explain why
Amazon ( AMZN - Free Report) and NVIDIA ( NVDA - Free Report) are like software stocks in the sense of their transformational power.
That's right. NVDA is as much a software company as a hardware one.
Because the way they design their advanced GPU/machine-learning/deep-learning workhorses on the CUDA (Compute Unified Device Architecture) platforms requires software intelligence that only their computer scientists know how to engineer.
As Jensen Huang described the recent "full stack" reveal of the new Turing RTX graphics system, it combines the full spectrum of AI hardware and software.
Suffice to say, NVDA is a hardware + software company like none other that probably deserves a 40X valuation multiple.
For more background on the stack of interconnected platforms and technologies that NVIDIA creates to build the power tools of gaming and AI, see my recent article...
NVIDIA Gaming Drives the Deep Learning/AI Revolution Biotech Will RecrEATe the World Too
If you've been following my trading (and listening to me rant) for the past few years, you know the other technology I strongly favor besides anything AI-related is Biotech.
And large parts of the Biotechnology industries are also software-driven because the human genome is essentially an information-based code.
Some scientists even argue that the genetic code is digital since the DNA molecule is like an “either-or-or-or” memory device, storing a sequence of digits with four different "bits" for the code (A-T-G-C) instead of the computer binary version of zeros and ones.
This week for my Healthcare Innovators investor service, I dove back in to bluebird bio under $170 after several bits of good news, including their new collaboration with another oncology-focused firm who specializes in using AI for their R&D. Here's the copy of that trade alert...
Portfolio is making the following (2) buys with suggested ideal buy ranges...
bluebird bio ( BLUE - Free Report) : That support at $150 was a rock and with two big catalysts (see below), we may not see it below $160 again. Ideal Buy Range: $XXX-XXX (reserved for subscribers). CRISPR Therapeutics ( CRSP - Free Report) : Before this week's move higher in Biotech, our two other CRISPR plays, EDIT and NTLA, were acting tough as the pessimism about gene editing dangers subsides. We let go of this one above $57 last month for a 10% gain, so even though our edge here is not ideal near a $2.5 billion market cap, we want to own the most-favored player in the health technology of the future. Ideal Buy Range: $XX-XX (reserved for subscribers).
Over the weekend I told you that I thought the chances didn't favor a breakout move higher in Biotech in September-October.
But lots of good news has surfaced since then, including EU approval of CAR-T therapies.
Not coincidentally, REGN is leading the IBB surge higher and is a partner with BLUE in CAR-T gene and cell therapies.
And here's the news on BLUE's move to incorporate Artificial Intelligence (from last Thursday but the market didn't seem to care about until this week)...
Bluebird Bio and Gritstone Oncology partner to develop cancer cell therapies using AI
bluebird bio and Gritstone Oncology will collaborate to research, develop and commercialize products for the treatment of cancer using cell therapy. Gritstone Oncology will leverage its proprietary Edge artificial intelligence platform to analyze specific tumor types and natural T-cell receptors directed to those targets for use in bluebird bio's established cell therapy platforms. bluebird bio will conduct all development, manufacturing and commercial activities and the partnership will enable improved patient selection for clinical development of such therapies.
SunTrust and Wells Fargo analysts spoke favorably of this collaboration and reiterated their BLUE price targets of $223 and $242, respectively.
We could still see a classic autumn stock market correction in Sep-Oct as we head into some very contentious mid-term elections, but we are long-term investors in these companies and we will come out on top over 6-12 months with these investments. I think the risk reward in these stocks is solidly better than 2:1 in our favor with potential 20% downside outweighed by 40% upside.
(end of Healthcare Innovators intra-day buy alert)
Celgene, another BLUE partner, is already using advanced AI technologies to improve patient recruitment for clinical trials. According to their IT partner Knowledgent, Celgene is employing machine learning and AI-based applications across the clinical operations value chain with the aim to make significant reduction in clinical trial length.
I hold no doubts that Tech/Software/Biotech will continue to recrEATe the world as we know it
very rapidly, making each decade unfold with a century's worth of disruption.
Disclosure: I own NVDA shares for the Zacks TAZR Trader portfolio and shares of BLUE, CRSP, REGN and CELG for the Zacks Healthcare Innovators portfolio.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the Healthcare Innovators and TAZR Trader services. Click Follow Author above to receive his latest stock research and macro analysis.
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