The major equity indices have rebounded nicely on Tuesday following a rather dour note to start the week. However, the same cannot be said about software stocks, which have sunk against the grain. Popular sector participants Asana (NYSE:ASAN), Monday.com (NASDAQ:MNDY) and Squarespace (NYSE:SQSP) each printed red ink on the daily chart to varying degrees. Recession fears and competition risks weigh heavily, causing analysts to impose downgrades and target price cuts.
SQSP stock, a website building and hosting company based in New York, suffered the steepest decline among the aforementioned software stocks. It dropped about 6% in the early afternoon session. Notably, on May 31, Credit Suisse initiated coverage on SQSP, assigning it a “neutral” rating and a $25 price target. More recently on July 14, JMP Securities downgraded shares to “market perform” from “outperform.”
Monday.com, a cloud-based platform that enables users to create their own applications and work management software, didn’t fare any better. Although the least impacted by Wall Street – shedding 2% of market value – analysts saw diminished potential for MNDY stock. Yesterday, Piper Sandler cut its price target to $150 from $200. In April of this year, Goldman Sachs cut its price estimate to $270 from $390, reflecting gradually declining confidence in software stocks.
Finally, RBC Capital Markets analyst Rishi Jaluria laid into Asana, noting the work management platform and content delivery network specialist Fastly (NYSE:FSLY) were both recession prone. Jaluria downgraded both companies to “underperform” from “sector perform.”
Software Stocks and the Economy
While the RBC analyst likely won’t attract well wishes from investors of software stocks, Jaluria laid out the broader assessment for the sector when addressing Asana’s shortfall. In particular, the analyst stated Asana is a “Silicon Valley solution to a Silicon Valley Problem.”
In other words, the total addressable market for Asana’s project management business might not be adequately large. Further, such a narrow focus makes Asana and similar software stocks vulnerable to intense competitive pressure. This pressure is intense because of worrying fissures in the economy.
Obviously, in order for the work management platforms under Asana and Monday.com to succeed, there must be work to manage. Unfortunately, a wave of layoffs at high-profile technology firms suggests both consumers and industries are engaging in serious belt-tightening. If so, it’s only a matter of time before headwinds start beating against many other software stocks.
Why It Matters
Unlike segment-specific challenges such as an equity market implosion or a real estate bust, soaring inflation is a problem that affects everyone. In fact, the U.S. Bureau of Labor Statistics points out that following a spike in the second quarter of 2020, real wages of fulltime workers have aggressively declined. Eventually, with everyone suffering from a loss of purchasing power, baseline spending invariably declines.
Unfortunately, software stocks are caught between a rock and a hard place. Issuing companies offer valuable services, but these services are largely only relevant within a burgeoning ecosystem. Under a recessionary environment, there’s not much to manage, effectively rendering management software moot.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
