The software stock has trailed the S&P 500 by an abnormally wide margin over the past year, creating a buying opportunity.
AppLovin’s AI-powered platform helps brands create and optimize the performance of ad campaigns.
Atlassian’s AI software helps technical (DevOps) and business teams collaborate and complete projects.
10 Actions We Like More Than AppLovin ›
The S&P North American Technology Software Index tracks the performance of 111 software stocks. Underperformed S&P 500(SNPINDEX: ^GSPC) down 19 percentage points over the past year, the software industry’s worst relative performance since the 2022 bear market.
Barring that incident, software stocks haven’t underperformed the S&P 500 at any point in the past decade. And the reason for this trend is artificial intelligence (AI). Specifically, investors are concerned that AI will disrupt traditional business models and reduce demand for many software products.
Morgan Stanley analysts Sanjit Singh and Keith Weiss see things differently. “AI-triggered productivity will expand the developer pool and drive a wave of application modernization initiatives.” Against this backdrop, the recent underperformance of software stocks creates a buying opportunity seen only once in the past decade.
Here’s why AppLovin(NASDAQ: APP) and Atlasian(NASDAQ: TEAM) are my picks for the best AI software stocks to buy right now.
Image source: Getty Images.
AppLovin develops ad technology software that helps brands engage consumers and monetize web content through targeted campaigns. The company initially focused on mobile games, where it helped developers market and monetize apps, but more recently expanded into e-commerce advertising. This feature is part of a new self-service platform that simplifies the onboarding process and will eventually automate every workflow.
AppLovin differentiated itself in two important ways. First, they earn revenue based on ad performance (ie, cost-per-action), while competitors like Trade office simply take a percentage of the ad spend. Second, the artificial intelligence (AI) that powers its recommendation engine (Axon) outperforms similar targeting tools from other advertisers.
indeed Morningstar analyst Mark Giarelli says Axon has played a central role in the company’s success. “AppLovin generates a 45% higher return on ad spend than [Meta Platforms] and 115% higher compared to secondary advertising platforms like TikTok, PinterestSnapchat [by Snap]and YouTube,” he wrote in a recent note to clients.
Wall Street expects AppLovin’s adjusted earnings to grow 58% annually through 2027. That makes the current valuation of 66 times earnings seem reasonable, especially when the company has beaten the consensus earnings estimate by an average of 21% over the last six quarters.
Among 32 analysts, AppLovin has an average target price of $774.50 per share. This represents a 45% premium to the current share price of $533. Patient investors should feel comfortable buying a small position today.
Atlassian develops work management and collaboration software for development and operations (DevOps) teams and non-technical teams such as marketing and human resources. The company also develops IT service management software. CONSULTANCY Gartner recognized Atlassian as a technology leader in DevOps, marketing work management and enterprise service management platforms.
Atlassian differentiated itself in two ways. First, it invests more in research and development than its peers because it relies on self-service sales and word-of-mouth marketing. Second, it is the only work management software provider that connects technical, non-technical and IT services teams on a common platform, which not only encourages better collaboration across the enterprise, but also provides the company with numerous opportunities to upsell existing customers.
Atlassian introduced a suite of generative AI features called Rovo. It supports intelligent search, process automation and code generation to improve the productivity and efficiency of business teams. As a well-established software vendor in multiple product categories, Atlassian could be a substantial winner as the AI boom unfolds.
Wall Street expects Atlassian’s adjusted earnings to grow 22% annually through the fiscal year that ends in June 2027. That makes the current valuation of 31 times earnings look reasonable, especially since the company has beaten the consensus earnings estimate by an average of 16% over the past six quarters.
Among 34 analysts, Atlassian has an average price target of $225 per share. This represents an 84% premium to the current share price of $122. With the stock trading 62% below its high, investors have a great opportunity to buy a short position.
Before buying shares in AppLovin, consider the following:
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Trevor Jennewine holds positions in The Trade Desk. The Motley Fool has positions in and recommends Atlassian, Meta Platforms, Pinterest and The Trade Desk. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
A Once in a Decade Investment Opportunity: The 2 Best AI Stocks to Buy Now was originally published by The Motley Fool
