And right now we are 2 minutes away from the end of the trading day. Romaine Bostick alongside Kristine Aquino, taking you through to that closing bell with a global simulcast. We're joined now by Carol Massar, Tim Stenovec.Welcome to our audiences across all of our bloomberg platforms, television, radio and our partnership with you to appear to pass the most crucial moments of the day. A rebound rally here on this Tuesday afternoon and some big earnings up ahead that could maybe aid or hinder further gains ...

Summary of EDA Industry and Company Insights Industry Overview - **Industry**: Electronic Design Automation (EDA) - **Key Players**: Cadence Design Systems (CDNS) and Synopsys (SNPS) - **Market Dynamics**: The EDA industry is expected to experience volatility due to AI-driven disruptions, but high switching costs and ecosystem lock-in are likely to limit risks to incumbents [1][10][31] Cadence Design Systems (CDNS) - **Earnings Expectations**: CDNS is set to report December-quarter results on February 17, with expectations of upside driven by robust IP growth and a record backlog exceeding $7 billion [11][17] - **Revenue Guidance**: Anticipated revenue growth for 2026 is slightly above the consensus estimate of 12% YoY, supported by the Hexagon acquisition and strong IP sales, which account for 14% of revenue [2][13] - **Operating Margin Risks**: The Hexagon acquisition may pose downside risks to the operating margin estimates for 2026, which are expected to expand by 100 basis points [2][18] - **Valuation**: CDNS is currently trading at a 60% premium to the S&P 500, with a price target of $385, reflecting a valuation multiple of 40x C27 EPS [5][71] Synopsys (SNPS) - **Earnings Expectations**: SNPS will report January-quarter results on February 25, with expectations of muted guidance for F2Q26 due to seasonality and the sale of its Processor IP Business to GlobalFoundries, estimated at $70 million [3][21] - **Revenue Guidance**: The company is expected to reiterate its F26 revenue outlook, with potential upside to EPS due to lower interest expenses [25][29] - **Valuation**: SNPS is trading at a 32% premium to the S&P 500, with a price target of $580, reflecting a valuation multiple of 32x C27 EPS [6][79] Key Insights - **High Switching Costs**: The EDA market's high switching costs, driven by foundry-certified workflows, limit the impact of AI disruptions on incumbents like CDNS and SNPS [4][41] - **Market Position**: CDNS and SNPS together command 65-70% of the EDA market, benefiting from significant operating leverage and R&D investments [52] - **Growth Drivers**: The semiconductor industry's record profitability supports the EDA industry's ability to sustain low-double-digit revenue growth, with R&D spending increasing as a percentage of semiconductor revenue [34][35][38] - **Risks**: Potential risks include geopolitical tensions affecting export restrictions, rising competition from emerging EDA providers, and macroeconomic downturns leading to R&D budget cuts [72][81] Conclusion - **Investment Strategy**: Both CDNS and SNPS are rated as Buy, with expectations of sustained revenue growth driven by strong demand in the semiconductor sector and strategic acquisitions enhancing their market positions [6][70][78]

Core Viewpoint - The AI sector remains promising, with significant growth potential and opportunities for investment despite recent volatility in stock prices [7][40][67]. Market Overview - The AI stocks experienced a sell-off similar to previous market declines, with the S&P 500 dropping approximately 15% during a recent period [8]. - The current market is characterized by confusion, with geopolitical events influencing investor behavior and leading to volatility in both tech and safe haven sectors [17][22]. AI Sector Insights - The global AI market is projected to grow from $539 billion in 2026 to over $3 trillion by 2033, driven by investments from major tech companies and increasing demand for data centers [40][42]. - Adoption of AI technologies is expanding across various sectors, including healthcare and manufacturing, indicating a long-term trend rather than a temporary phase [15][20]. Stock Recommendations - The top 10 AI stocks recommended show an average revenue growth rate of 38% and an EPS growth rate of 99%, significantly outperforming the S&P 500 and the Magnificent Seven stocks [66][67]. - Specific stocks highlighted include: - **Lumentum Holdings (LITE)**: Up 402% in the last year, with a long-term growth rate of 61% [70]. - **Micron Technology (MU)**: Up 387% in the last year, with a long-term growth rate of 51% [72]. - **Ciena (CIEN)**: Up 215% in the last year, with a long-term EPS growth CAGR of 44% [74]. - **General Motors (GM)**: Up 76% in the last year, utilizing AI for enhanced vehicle connectivity [79]. - **Taiwan Semiconductor Manufacturing (TSM)**: Up 71% in the last year, with strong growth metrics [80]. - **Credo Technology (CRDO)**: Despite recent declines, it has strong growth potential with a forward EPS growth rate of 248% [97]. - **AppLovin (APP)**: Up almost 1000% within Alpha Picks, with a long-term growth rate of 48% [98]. - **Globus Medical (GMED)**: In the healthcare sector, showing strong growth metrics [100]. Investment Strategy - The strategy emphasizes buying on dips, particularly for stocks with strong fundamentals that have recently experienced price declines [35][106]. - The quant model used for stock selection focuses on multiple factors, including growth, value, and profitability, ensuring a diversified approach to investment [51][60].

Core Viewpoint - The Vanguard Information Technology ETF has significantly outperformed the market over the past decade, primarily driven by the AI boom, but it lacks exposure to key companies in the AI sector, making it potentially less attractive for investors seeking broad AI stock exposure [1][2]. Group 1: ETF Performance and Composition - The Vanguard Information Technology ETF (VGT) has increased by approximately 670% over the past decade, compared to a 270% gain for the S&P 500 [1]. - The ETF tracks the MSCI US IMI Information Technology 25/50 index and holds stakes in 320 companies, with nearly 59% of its value concentrated in the top 10 holdings [3]. - The top three holdings—Nvidia, Apple, and Microsoft—account for nearly 45% of the ETF's assets, indicating a high concentration risk [4]. Group 2: Missing Key Companies - The ETF does not include major players in the AI ecosystem such as Alphabet, Amazon, and Meta Platforms, which are classified in different sectors [5][6]. - Alphabet and Meta are categorized under the communication services sector, while Amazon falls under consumer discretionary, thus excluding them from the ETF's holdings [6]. - The absence of these companies is significant as Amazon and Alphabet are two of the largest cloud infrastructure providers, holding market shares of 29% and 13%, respectively, which are crucial for AI model training and operation [7]. Group 3: Implications of Missing Companies - The exclusion of Amazon, Alphabet, and Meta from the ETF limits its exposure to the AI megatrend, as these companies play vital roles in cloud services and AI development [8].

Core Viewpoint - Paycom Software, Inc. (NYSE:PAYC) is recognized as a strong long-term tech investment, despite recent price target reductions by various analysts due to broader software multiple contractions [1][2][4]. Price Target Adjustments - BMO Capital has lowered its price target for Paycom from $190.00 to $175.00 while maintaining a "Market Perform" rating, citing broader software multiple contractions as the reason [1]. - TD Cowen analyst Jared Levine has reduced the price target from $200 to $184 but retains a "Buy" rating, reflecting updated estimates based on the latest Fed Funds rate expectations [3]. - Citi has also adjusted its price target from $191 to $185 while keeping a "Neutral" rating, following discussions with company management [4]. Revenue Growth Potential - Analysts suggest that the risk of further multiple compression may be mitigated if Paycom can maintain double-digit recurring revenue growth, excluding float [2]. Company Overview - Paycom Software, Inc. provides a cloud-based human capital management (HCM) solution delivered as software-as-a-service, targeting small to mid-sized companies [4].

Summary of Conference Call Notes Industry Overview - **Industry**: Application Software, specifically focusing on Software as a Service (SaaS) in North America - **2025 Performance**: Application SaaS underperformed due to muted revenue growth, limited upward estimate revisions, and multiple compression driven by AI-related concerns. The valuation discount on application SaaS relative to broader software increased to approximately 37% from 20% a year ago [3][7][21]. Key Insights - **AI Concerns**: Peak AI fears were noted in 2025, leading to a shift in investor sentiment. Companies emphasized competitive advantages such as proprietary data and large installed bases but struggled to improve investor confidence [3][23]. - **Bull Case for 2026**: The bull case hinges on application software becoming the primary delivery mechanism for AI capabilities, potentially expanding the total addressable market and improving growth trajectories. However, the lack of clear growth inflection in 2025 left many vendors perceived as disrupted by AI [3][23][35]. - **CIO Survey Insights**: A survey indicated that 19% of CIOs operationalizing AI/ML technologies view application vendors as primary partners, an increase from 13% in the previous quarter. This suggests a shift in perception towards application software as a vehicle for AI functionalities [26][29]. Investment Recommendations - **Selective Approach**: A selective investment strategy is recommended, favoring companies with strong positioning in the "AI Success Framework" and idiosyncratic growth stories. Preferred companies include HUBS, KVYO, WIX, AMPL, BL, DSGX, and NAVN [2][7][52]. - **Price Target Adjustments**: Price targets for several companies were updated, reflecting changes in growth outlooks and market conditions. For example, HUBS was adjusted to $577, while KVYO was set at $42 [5][54]. Risks and Considerations - **AI Risks**: The report outlines three core areas of AI-related risks: DIY risk, start-up risk, and seat-based model risk. Evidence suggests that fears regarding these risks may be overstated, but ongoing monitoring is necessary [24][26][27]. - **Cyclical Headwinds**: The optimization cycle that began in 2022 is largely digested, with stabilization in key performance indicators like ARR and billings growth. However, broad-based positive spending revisions remain absent, necessitating a cautious approach [35][36]. - **2026 Spending Growth**: Software is expected to see modest growth in spending, projected at 3.8%, compared to declines in hardware and communications sectors. This indicates a relatively healthier positioning for software in IT spending plans [43][44]. Conclusion - **Outlook for 2026**: The outlook for application SaaS in 2026 is cautiously optimistic, with potential for improved sentiment as AI risks are reassessed and growth trajectories begin to stabilize. However, the absence of broad-based positive revisions in spending necessitates a selective investment approach [2][35][52].

Group 1 - OneStream Inc. is considered one of the best low-priced technology stocks to buy, with analysts providing mixed ratings and price targets [1][2][3] - Citi analyst lowered the price target on OneStream to $24 from $25 while maintaining a Neutral rating, citing uncertain demand but noting the reopening of the US government as a positive factor [1] - BTIG analyst initiated coverage with a Buy rating and a $25 price target, forecasting over 20% growth by 2025, supported by a large market for modernization of legacy systems [2] Group 2 - Mizuho cut its price target on OneStream to $25 from $30 while maintaining an Outperform rating, identifying AI and data modernization as key growth drivers for the software sector [3] - The projected median revenue growth for the software sector in 2026 is in the low teens, which is seen as conservative and potentially beatable, presenting an attractive risk-reward profile [3] - OneStream delivers a unified, AI-enabled software platform, but there are concerns that other AI stocks may offer greater upside potential with less downside risk [4]

Group 1 - Citi lowered the price target on Paycom (PAYC) to $185 from $191 while maintaining a Neutral rating on the shares [1] - The firm adjusted its models in the application software group after discussions with management [1] - Companies are experiencing a stable but uncertain demand environment, with some relief from the reopening of the U.S. government [1] Group 2 - Citi has named Pegasystems (PEGA) as its new top pick, highlighting the company's leadership in artificial intelligence monetization [1] - The firm also sees growth opportunities at Blackline (BL) and Workiva (WK) [1]

Group 1 - Citi analyst Steven Enders raised the price target on Paylocity (PCTY) to $179 from $175 while maintaining a Buy rating on the shares [1] - The firm adjusted models in the application software group after discussions with management, indicating a stable but uncertain demand environment [1] - The reopening of the U.S. government is providing some relief to companies in the sector [1] Group 2 - Citi has named Pegasystems (PEGA) as its new top pick, highlighting the company's leadership in artificial intelligence monetization [1] - The firm also sees growth opportunities at Blackline (BL) and Workiva (WK) [1]

Group 1 - Citi lowered the price target on Monday.com (MNDY) to $293 from $319 while maintaining a Buy rating on the shares [1] - The firm adjusted models in the application software group after discussions with management, indicating a stable but uncertain demand environment [1] - Citi identified Pegasystems (PEGA) as its new top pick, highlighting the company's leadership in artificial intelligence monetization [1] Group 2 - Citi expressed positive sentiment towards the growth opportunities at Blackline (BL) and Workiva (WK) [1]