Software stocks got whacked in September. Here's why RBC says they could tumble another 25% before bottoming out.

Associated Press
  • Software-as-a-service companies – which licence software products on a subscription basis – took a beating in the markets in September.
  • According to RBC Capital Markets, the average return of the 21 SaaS companies the firm covers was -5.9% for the month, while the S&P 500 rose 1.7%.
  • RBC also said SaaS companies could fall another 25% as investors rotate into defensive stocks in the face of geopolitical uncertainty and concerns about budget tightening.
  • Visit the Business Insider homepage for more stories.

Software-as-a-service companies struggled to keep up with the market in September, and they might have even further to fall, according to RBC Capital Markets.

The average return in September for the 21 SaaS companies covered by RBC was -5.9%, while the S&P 500 index gained 1.7%. RBC’s coverage universe includes Adobe,Salesforce,Dropbox,Microsoft,Oracle,Zoom, and other high-growth SaaS companies.

Sell-offs in 2015 and 2018 left the iShares Expanded Tech-Software ETF -which tracks a basket of software stocks – trading more than 20% lower, and based on those previous routs RBC believes SaaS companies could fall another 25% this year.

“On this comparative basis, it suggests we’re potentially only in the middle innings of a drawdown,” the firm said in a note to clients on Tuesday.

High-growth software companies covered by RBC dropped even further than the average, falling 14.9% in September. According to RBC, investors seem to be rotating into defensive stocks and sectors amid geopolitical uncertainty and concerns of corporate budget tightening.

SaaS business models can run into trouble when their corporate customers start to reign in spending because they’re less likely to invest in new technology.

RBC’s analysts also spoke with a number of Chief Information Officers and found that IT spending is likely to slowdown in the coming quarters.

“CIOs are being asked to prepare budget scenarios in the event of a significant market correction where spending across the board would need to be reined in,” RBC added. “We believe this is illustrative of the macro uncertainty.”

Read more: Dan Fuss is revered as ‘the Warren Buffett of bonds.’ He walked us through the investing approach that’s delivered market-beating returns and turbocharged his 61-year career.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.