Barclays sees short-term upside for U.S. software despite AI uncertainty in Q2

Investing.com -- U.S. software stocks may see short-term gains in the current earnings cycle, even as questions over artificial intelligence remain a source of investor unease, according to Barclays.

“Our checks show solid end demand and valuation levels are much lower, but is this enough to overcome the AI uncertainties? Maybe, not for the long run, but we expect a positive bounce in the short-term nonetheless,” analyst Raimo Lenschow said in a Monday note.

Lenschow noted that while investors continue to express concerns about the impact of generative AI, the near-term setup looks better than expected.

“Our checks are solid to slightly better than the on-cycle ones,” he wrote, adding that given the weak performance of most software stocks outside a few AI winners, “we would expect a positive bounce as numbers are holding up and valuation levels are low.”

Lenschow highlighted Salesforce (NYSE:CRM) and Elastic (NYSE:ESTC) as names with favorable risk-reward in this environment.

For Salesforce, the analyst pointed to strong survey results showing continued customer interest in its AI offerings. He expects the company to post another small beat in the quarter, though the key catalyst will be October’s Dreamforce event, when it is likely to launch the next version of its Agentforce platform.

“To us, this suggests that news flow from here will likely be more positive than negative, which should drive shares.”

Barclays reiterated its Overweight rating on the stock while trimming the price target to $316 from $347.

Elastic enters the period with what Barclays called a “very conservative guidance” from its new CFO, which it believes should allow the company to deliver and raise guidance.

Barclays said its checks indicated “healthy conversions from proof-of-concepts around hybrid search to proper projects that use ESTC’s vector database capabilities,” providing a favorable setup for the quarter.

Overall, the bank kept its positive industry view intact, arguing that while AI uncertainties will likely continue to weigh on sentiment, near-term results and lower valuations set the stage for a constructive earnings season.

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