Why Are Software Stocks ZS, SNOW, RBLX, TEAM Down Today?

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  • Negative momentum is sweeping across the software wing of the tech sector.
  • It is primarily driven by the recent Federal Reserve rate hikes.
  • But on top of it, Zscaler (ZS) has just announced the resignation of its president.
"software stocks" - Why Are Software Stocks ZS, SNOW, RBLX, TEAM Down Today?

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Software stocks are down on negative momentum spurred by the recent rate hikes. After the Federal Reserve announced a 75-basis-point rate hike late in September, many questions arose. Some investors worried that it might trigger a housing market recession. Others highlighted certain financial market sectors that stood to lose the most.

According to Jefferies, one of the most at-risk areas is the software space of the tech sector. Early in the month, the investment bank issued a report saying that “winter came quick” for software stocks. One week later, many of the sector’s leading names are down as bearish energy continues. However, rate hikes aren’t the only thing pushing software stocks down today.

Let’s take a look at the companies that are falling and what investors can expect moving forward.

What’s Happening With Software Stocks

It hasn’t been a good day — or a good week — for most software stocks. But these companies were struggling before the Fed announced the recent hike. However, since the announcement, many have taken a turn for the worse. Sector leader Snowflake (NYSE:SNOW) plunged this morning as markets opened. While its current pattern hints at a rebound, it is still down 8% for the day. Its peers Zscaler (NYSE:ZS) and Atlassian (NASDAQ:TEAM) are both down nearly 6.5%. The space’s best-performing stock is video game producer Roblox (NYSE:RBLX), which has fallen less than 5% as of this writing.

Jefferies analyst Brent Thill laid out the reasons for his firm’s bearish take on software stocks. In a research note, he stated that “Software companies have been slow to get in front of tougher times — only 36% of coverage has cut estimates.” Thill added that he expects to see more software producers trim estimates. The analyst doesn’t expect companies to “fully reflect in guides” until 2023. Today’s events suggest that his bearish thesis is playing out.

As noted, though, part of today’s turbulence is due to external headwinds. Yesterday, Zscaler announced that its president, Dr. Amit Sinha, has accepted a position at a privately held tech company. While Dr. Sinha will remain on the company’s board of directors, he will be stepping down on Oct. 21.

Some of its peers have worse news to report. RLBX recently received a highly bearish take from Wall Street. Barclays analyst Mario Lu has reiterated an “underweight” rating and predicts downside of more than 40%. He attributes this to the company’s limited user base and structural problems, issuing a bearish $20 price target. As his team sees it, there is no reason to believe the company will see sustainable user volume growth. Yesterday also brought reports that Snowflake has become one of the S&P 500’s weakest stocks, along with tech giant Apple (NASDAQ:AAPL).

What Comes Next

While Barron’s reports that both the tech and consumer-discretionary sectors have shown considerable weakness, it also notes that they are likely to improve as markets do. This is an important point for investors to consider. For all the recent volatility, software stocks were rising not too long ago. In late August 2022, Snowflake reported impressive earnings and sales growth, sending up many of its cloud computing peers. Zscaler also reported strong quarterly earnings and issued a positive outlook for the first quarter of 2023.

Investors should recognize this period of downturn as an opportunity to acquire valuable software stocks on the dip. If market conditions do improve in 2023, these companies will bounce back and perform well.

On the date of publication, Samuel O’Brient 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.


Article printed from InvestorPlace Media, https://investorplace.com/2022/10/why-are-software-stocks-zs-snow-rblx-team-down-today/.

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