Software Leaders Share Insights at Baird Silicon Slopes Event

The Expectations Game

Following a software market slowdown in 2023, companies reset growth expectations and entered 2024 with Street estimates projecting 12% y/y growth for the software group, compared to 20-26% in 2020-2022. This reset presents companies with an opportunity to surprise to the upside and deliver strong results as markets continue to favor Technology with the Nasdaq up 6.8% YTD. Secular growth stories and category leaders continue to outperform, while diminishing cost optimization impacts across Cloud Titans and a reacceleration of existing migrations could add to current growth estimates. Overall, software valuations have returned to the 10-year average; however, high-growth companies, new issuers and growth investors are focused on the upside potential going forward. Company fundamentals into Q1 earnings, geopolitics and election outcomes will drive equities in the second half of 2024 as bifurcation in portfolio managers’ sentiment might start to emerge.

Emerging Vertical Software Focus

Vertical software offered investors a safe haven in 2022 given lower demand variability in specialized end markets compared to the broader enterprise software sector. Vertical software bookings are starting to stabilize in 2024 following some deceleration in 2023. In addition to end market resilience and strong free cash flow metrics, which have been favored by investors in the current software cycle, many verticals, including industrials and life sciences, are seeing a pivot in underlying trends, indicating an early opportunity for the vertical software rebound.

GenAI Adoption Implications

GenAI is driving transformation across sectors from front-office software to life sciences research and education technology. As GenAI adoption grows, cloud data will be a critical part of enabling enterprises to leverage more advanced capabilities. In the meantime, companies are focused on speeding up technology development using AI, and investors are modeling 2025-2027 financials to define their investment theses while also searching for second derivative winners and beneficiaries.

Tackling Cyber Risks

Cybersecurity remains a top priority across enterprises and their budgets (with GenAI closely competing for IT spend), and enterprises are shifting their focus from detection to prevention and protection. While demand trends are still strong, consolidation is emerging as a key theme in this category as enterprises focus on reducing the number of vendors. However, point solutions will remain critical to providing innovative and unique tools to complete a comprehensive cybersecurity stack.

New cybersecurity challenges continue to materialize, while high profile cybersecurity breaches and SEC regulations draw ever more attention to cyber risks. A talent shortage is increasing the importance of managed service providers and heightens the need to properly manage alert volumes. Rapidly advancing cybersecurity threats are increasingly targeting smaller businesses, which have historically relied on minimal cybersecurity solutions and are now faced with growing costs to address increasing cyberattack volume and complexity. Compromised identities represent a growing proportion of breaches with identity protection growing in the cybersecurity priority list. In addition, enterprises are facing the rise of “shadow IT” as well as the need to unlock more software tools to retain and recruit top talent. As these challenges continue to grow, cybersecurity will remain a top-priority enterprise spend category in the near term.