2026-01-08 10:42Summary of Software Equity Research Conference Call Industry Overview - The software sector is currently experiencing a deceleration in growth, lagging behind other sectors such as semiconductors. The recommendation is to stay underweight in software investments as AI monetization is expected to be gradual, with significant growth contributions needed to alleviate fears of AI disintermediation [1][2][14]. Key Companies and Recommendations Mega Cap - Microsoft (MSFT): Rated Buy with a price target of $675. Expected to benefit from strong AI tailwinds and backlog growth, with potential EPS exceeding $22 by FY28 [54]. - Meta (META): Rated Buy with a price target of $910. Anticipated to outperform due to AI investments and potential revenue growth from WhatsApp and other platforms [58]. Large Cap - Amazon (AMZN): Rated Buy with a price target of $300, up from $275. Expected to recover from underperformance in 2025, with AWS sales accelerating due to improved AI capabilities [55]. - Oracle (ORCL): Rated Buy with a price target of $400. Positioned to benefit from AI workloads and a significant backlog, despite concerns over AI-related debt [67]. Mid Cap - Intuit (INTU): Rated Buy with a price target of $850. Strong historical performance and potential for growth in tax and small business software [61]. - Unity (U): Rated Buy with a price target of $55. Expected to leverage AI for ad targeting, with significant growth potential [70]. Small Cap - Upwork (UPWK): Rated Buy with a price target of $27. Anticipated topline acceleration after several negative quarters, supported by AI project tailwinds [73]. Core Insights - The software sector is expected to see a rotation from infrastructure to application software in the second half of 2026, with improved sentiment anticipated for application software [2][14]. - AI spending is a critical theme, with expectations that 2026 will see more AI projects moving to production, leading to tangible ROI [44][45]. - The overall sector valuation has returned to historical averages, indicating potential for multiple expansions as AI monetization begins to lift growth [41]. Additional Notable Points - Concerns about AI spending bubbles and debt funding needs have emerged, particularly in the second half of the year [28]. - M&A activity in the software sector is expected to accelerate, driven by low multiples and interest rates [18]. - The sentiment around application software is currently negative but is expected to improve as AI-driven monetization becomes more evident [45]. Conclusion - The software sector is in a transitional phase, with a focus on AI and infrastructure. Investors are advised to be selective, favoring large-cap companies with strong positions in AI and infrastructure while remaining cautious about application software until sentiment improves.