The rally in software stocks — led by Palantir Technologies and Oracle — will continue into 2025, according to a Jefferies analyst.
Jefferies analyst Brent Thill said in a recent note to clients: "We view four key catalysts to drive higher growth and valuation in 2025: improving fundamentals; accelerating AI monetization; a more favorable (merger) environment; and budgets unlocking following election overhang."
Also, for most big application software companies, how to charge for AI-related products has been an issue. Having struggled to generate new revenue from "copilots," software companies are now turning to AI agents.
As a result, Palantir stock has gained 293% so far this year while Oracle has advanced 79%. Further, the iShares Expanded Tech-Software Sector exchange traded fund — an industry index that includes Microsoft and many big-cap software companies — has climbed nearly 30% in 2024 and has shot up 18% since the start of October.
Salesforce Earnings Due Dec. 3
Palantir stock ranks No. 5 in the IBD 50 roster of growth companies. Another software stock, ServiceNow, ranks No. 44. It's up roughly 47% in 2024.
Two wild cards for software stocks next year will be inflation and the economy. In 2022, the rise in interest rates pressured software stocks.
"Outside positive macro tailwinds, there are signs of the sector fundamentals improving where the percent of software companies tracked by our trading desk seeing higher forward quarter revenue estimates has been rising," Jefferies' Thill added in his note. "A combination of more favorable macro conditions and improving business momentum leads us to stay bullish for next year."
Aside from Palantir stock and Oracle, other expected top performers in 2025 include cybersecurity firm Fortinet.
Earnings reports are still coming in from enterprise software makers. Large-cap software company Salesforce reports third-quarter earnings on Dec. 3. Salesforce stock has climbed 27% this year.
Meanwhile, Workday on Tuesday reported third-quarter earnings and revenue that topped estimates. But Workday's fiscal 2026 subscription revenue outlook missed expectations.
Software Stocks: High Valuations
"Within our coverage, the five highest-valued names are Palantir, CrowdStrike, Cloudflare, Datadog and Snowflake," Thill said.
Meanwhile, Larry Ellison's Oracle stock has been partying like it's 1999. However, Microsoft stock has gained only 11% in 2024.
In 2023, the IGV software index soared 59% amid hype over AI stocks.
Many investors focus on software stocks with the highest percentage of subscription-based, recurring revenue. They're known as software-as-a-service, or SaaS, stocks. Other software companies, such as Snowflake and Datadog, have consumption-based business models tied to cloud computing platforms.
One thing to watch is that dealmaking in the industry could pick up next year, RBC Capital analyst Rishi Jaluria said in a recent note.
"We believe vendors with large cash balances, high margins, and/or slowing growth could increase their M&A activity as we exit 2024," he said. "We think Adobe (and) the hyperscalers — IBM, Palo Alto Networks, Salesforce, and Zoom Communications, among others — are well-capitalized and have cash available to deploy on acquisitions."
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
