Dips Never Last. 3 Stocks to Buy Now.

Dips don't last forever, but this one seems to be hanging on a little longer. There's still time to buy the dip, and there's still hope for a recovery. Joining us today is Whitney Tilson with Stansbury Research with an update on what is happening in the software sector. Whitney, so glad to have you on the show today. It's been a while since we've had you back, so I'm excited to talk about this. It's also been a while since we've talked about software. It's been a few months and uh you know back in that January, February, March time frame, we talked a lot about buy the dip in software. Uh this is a time to to buy these stocks. A lot of people had varying opinions on what was happening in the software sector. And I want to get an update from you to start with before we get into the three specific stocks you want to talk about today on what you think about where the software story stands today, roughly 6 months post the start of the SAS apocalypse. >> The SAS apocalypse. Yes. uh software stocks, the whole sector's gotten crushed. I would say starting late last year, it really began and there just seemed to be no bottom as investors panicked that these great businesses were all going to get put out of business or certainly impaired severely because of AI and uh people could, you know, replace these systems at low or no cost um using AI tools. was sort of the the thesis behind the SAS apocalypse that caused these stocks to drop anywhere from 50 to 80%. >> Yeah, the the the charts have been very ugly and I mean in the last month they have seen maybe a 10 to 15 maybe even 20% uh bounce back in some cases but they're still far down from their highs that we saw a year ago in most of these software names. Where do you think they are in this stage of recovery? Is this the biggest bounce we're going to get or is there room to to get back to those highs they were in last year? >> Yeah, uh we still think there's room to run. Uh the sell-off was way overdone and look there are some sort of generic software companies um that that can easily be replaced. It's uh you know there are hundreds of publicly traded software companies. So it's hard to impossible to make blanket statements because some of them probably will go away and will be replaced by AI. But you know starting with you know the biggest software company of all Microsoft uh is just so embedded in um into every corporation in the world practically you know ranging from the Excel and Word and the the tools we use. But what most people don't see is it's the guts of every corporation's uh you know internal systems. You know, Microsoft is not one of the three stocks I'm pounding the table on right now, though we've owned it for 14 years. I think in Stanbur's investment advisory, it's been a great winner. But I think there are uh better ways to play uh in companies that have established positions and that companies are are not going to be ripping out these software companies. you need to differentiate between the companies that are sort of missionritical inside uh its users operations and it's just naive and foolish. It's sort of this is the kind of group think that goes on out there in Silicon Valley. AI is this hot new thing and you know oh we can easily replace Microsoft for example and no you can't. Uh, so Microsoft's earnings recently, and it wasn't the stock's biggest one-day move ever on a percentage basis, but it was certainly up there in terms of billions of dollars of market cap added in a single day when Microsoft reported strong earnings. >> Yeah, we had a video on that very day when it was such a great day for Microsoft investors who hung in there, held on to the stock or who were adding to their position as the stock was on just a downtrend for so long. It was nice to see Microsoft investors have a really good day, to see the stock see that kind of a comeback. And one thing that came out of the conversations I had with some other analysts Whitney about Microsoft is that they actually are getting some of that AI story where people are looking at large language models but instead of paying for the tokens and claude or chat GPT since you already as a company have Microsoft they're uh doing shares for you Microsoft's version of AI for having their version of AI and that's the AI that their employees are expected to use. in it. I heard from some viewers who said that's very much the case at their companies that they are using Microsoft's AI. It's not just a software company. They also seem to be a player in the AI story too, >> right? I mean, the best positioned software companies are already integrating AI tools into their um it's basically these are all seat licensed businesses, you know, um and so I think um these companies, the good software companies that we've identified, I think will will ultimately benefit from AI. I'm excited to dive into these three names today of three software companies that you think are here for the long haul. The ones that are continue uh to do well and that's going to show up in their earnings. It's going to show up in the number of users they continue to have and grow and that user base they have. So excited to dive into these three names and for the update. I also wanted to give our viewers a chance to take a look at your special report that is out there right now. This has been one of the hottest reports in the whole industry and it's all about staying ahead of the curve on energy and other commodity demands. AI is bringing right now. It's a story that is rapidly evolving in the market and it's why this monthly report is so valuable for investors to follow. If you want to check out that special report, we have a special offer just for our market beat listeners today. You can scan the QR code or click the link down in the description to get that report and learn more from Whitney today. Again, it's a special offer that is limited time. So, if you want to take advantage of that, you should do that now. >> Let me just add on the commodity super cycles. uh you know the the we were early and completely nailed that nuclear energy would be a big beneficiary of the demand soaring demand for electricity uh thanks to all these AI data centers. We believe that that has in many ways run its course and that the next major theme uh will be geothermal energy harnessing the heat of the center of the earth which is as hot as the sun. Believe it or not, my uh mentor Warren Buffett um and his successor Greg Ael uh 25 years ago uh started investing in this area. We think this is going to be the next exciting uh cycle and we have a new report coming out about about geothermal energy and and the best way to position yourself for what we think is the next commodity super cycle. >> That's a really interesting area to to look at investing in for sure. Well, let's get on to your software picks for the day. These are the three software companies that you think still have a long runway ahead. What is the first software company you are looking at for a long-term buy? >> Sure. Um it's called Service Now. The ticker is NO and it provides a range of software tools um that allow big companies to manage um asset management, risk management, IT service management. I'm sort of looking at the list here. Portfolio management, IT operations, customer service management. It's it's a whole suite. This is a big company. It's got $122 billion market cap. And it uh was one of the great growth stocks of all time. And uh then this SAS apocalypse, fears about the SAS apocalypse uh emerged. And the stock got absolutely hammered, fell by well over 50%, you know, from almost 200 to 80 bucks. Um it's rallied back to 118 today, but it's still, you know, almost been cut in half even from here. It's an incredibly great business. And here's the thing. When you when you look at these companies, there is no evidence of the SAS apocalypse. Their margins are stable. Their growth rate is still there. They're gushing free cash flow. I mean, usually when you see stocks falling 50 to 80%. You see it in the numbers, right? The growth rate is stalled out. They start losing money. Uh, you know, whatever. In this case, there's no evidence yet. It's all this uh overhyped theory of the SAS apocalypse. And you know this is what young and naive people who've never worked in a large corporation come to believe the you know they get high on their own dope basically is is I think what's happening. This is a Silicon Valley theory that's infected the overall market. You know the the cost of these uh of service now's tool might be 1% of the cost of your of each employee right when you figure out salary and everything else you're paying the employee. And this is what enables you to manage your whole company and your workforce. And the idea that you're going to rip it out uh uh for to save 1% on your costs but totally disrupt your business is sort of ludicrous. So this is a stock that has historically traded at about 60 times forward earnings and today it's trading at 26 times forward earnings. So, and it's a super high margin business. Um, and it's still growing nicely and we think it still has, you know, great growth opportunities ahead of it. And it's trading at close to a market multiple. You know, as recently as a month ago, it was trading at a below market multiple. Uh, stocks rallied since then, but when you can buy one of the world's great businesses, uh, with incredible economic characteristics anywhere near a market multiple, that generally tends to work out pretty well. Yeah, I really love what you said about fundamentals here, Whitney, because if you look back at not just this last quarter's earnings report, but the last couple of quarters, those fears really aren't showing up in the fundamentals here. >> They haven't manifested itself yet. Um, but this would be true of software companies that are going away probably are still reporting decent earnings as well. Successful investing requires for forwardlooking and seeing what earnings look like 1 2 5 10 years from now. historical financials can be misleading, but we're certainly not seeing any evidence uh of of any kind of material impact to the business yet. I think you probably saw the blow up of the hedge fund situational awareness that went went belly up and he was shorting all of these names and he's a 24y old kid who was running $45 billion as recently as a month ago before completely imploding. But this is the kind of thing 24 year olds uh think. And so one of the reasons he blew up is is you know he was heavily overweight some of the I AI names that have pulled back. But then he was also short stocks like Service Now which have rallied hard. So he got killed on both sides of his book and he was of course levered 5 to1 like every naive young foolish money manager and he blew skyhigh. But you know it it actually gives me conviction in my software thesis that the people on the other side of the trade are not people with any experience or wisdom uh don't know anything about how large corporations work. These are uh these are young Silicon Valley types who the only thing they've the only market they've ever seen is the AI bubble. >> Yeah, that's an interesting way to look at what's happening in the market right now. And I think that that thesis could be what's showing up in the stock chart right now. And I I want to get your thoughts on that, too. Given what we just talked about, how the earnings aren't showing any evidence of an issue here that it's not really playing out in the fundamentals of the company. Are you surprised to see the stock has hasn't recovered more? Yes, it's had a nice bounce back from the bottom it was at, but it's still nowhere near the top yet. Is it surprising to you that we're still a half a year post that SAS apocalypse moment um and it's still down this low? >> Yeah. Well, it's really only been a month since it bottomed. So, uh you know, but that gives um investors the opportunity to get in and I I think the market's in a little bit of a wait andsee mode. um Service Now and uh many of the other software companies are saying, you know, not only is it AI not going to crush our business, it will actually enhance our business. It's an additional tool that we can add in and make our make our product more valuable. I think the verdict is still out. These companies are now going to have to go out and prove it and integrate it and and and and a few more quarters of high earnings growth that they've been delivering for decades in some cases. But that's the opportunity for us for forwards forward-looking investors who are not u who who recognize the flaw of the SAS apocalypse thesis and can get in and take advantage. So you know normally I like you know nailing stocks right at the lows. You know Service Now is probably up 30 35% from its lows but you know still down 40 50% from its highs and that's that's opportunity and it'll just take it'll take some time to play out. Yeah, there's a lot to to say about what analysts have to say about this one, and it really also applies to the the other names that we're looking at on this list today where the analyst action is a little bit bearish on these names. We're seeing some downgrades. We're seeing lowering of price targets. We're seeing some sell ratings and things like that coming from the analyst community on several of these software names. Why do you think that is? They all had uh strong buy ratings on the stock at its peak, reiterated those strong buys all the way down and then puked out at the bottom and changed their ratings and now they look like complete idiots because they their ratings they bottom ticked it and then it would be admitting that they're complete idiots to then turn around and put a strong buyback on it. You know, a month later the stock's up 35%. Right? So, you know, analysts to me tend to be a good contrarian indicator. they represent the consensus view and uh that's that's the that creates opportunity. The only way you can make money in investing is by betting against the consensus view and being right. So if you want to know what the consensus view is, just look at the analyst community. >> Yeah. And being right is the key here. >> And and by you have to have humility. You know, 80 90 95% of the time the consensus view is correct. Most stocks are somewhere within a range of plus or minus 10% or probably the the the market price in the consensus view is roughly correct. Where you make your money is looking where the crowd goes way too far in one direction or another and uh correctly identify that the crowd has gone crazy and uh there there's foolish group think going on and you bet against that. Stocks overshoot to the downside and overshoot to the upside consistently more than I could ever imagine possible. And that's why you don't want to use leverage. You need to be patient. And you need to anytime you buy a stock, you should fully expect that at some point in the future, it'll be down 20% from where you bought it. And you better figure out what you're going to do at that point or else you shouldn't own it. >> A lot of really good advice that applies to all of the names we're going to talk about on this list today. So keep a lot of this advice in mind as we dive into these next two names on the list. What is the second software stock that you are looking at as a buy right now, Whitney? >> Sure. Um it's called Viva Systems. Uh most people probably haven't heard of it because it's sort of it's a nichy kind of software only used by pharmaceutical companies and it tracks their clinical trials and so forth. And one of the reasons it's such a great business and why AI will never uh replace Viva uh uh software is because this is a very highly regulated industry and all of these clinical trials of course are going to be submitted to the FDA and you have to have doctor's notes and any adverse clinical outcomes etc etc very specific information just to this industry very heavily regulated and uh Viva Systems has basically 100% market share the top 20 biotech and pharma companies in the world all use Viva. It's sort of the standard for the industry, which means it's the standard for the regulators. The regulators are accustomed to seeing data presented, you know, that's been collected by Viva, etc. And again, this is a stock um that in its, you know, 15 years or a little over 10 years being public has traded at 60 times forward earnings. Last month, it got down to 16 times forward earnings. It's now bounced back and trades at 22 times forward earnings. And this company hasn't missed a beat. Um the only thing they've done is they used to take their gushing cash flow and cash was just piling up and now they started buying back a lot of stock because they saw how cheap their stock had become trading at a you know mid- teens multiple. So Viva Viva Systems is is a company I just wrote about by the way in my investing daily today. So, and I've written about all three of the stocks I'm discussing today in my investing. It's a free investing daily. And so, if anyone just types in Whitney Tilson's Daily, they can one sign up for it. It's free, but two, you can access the archive. >> Yeah. If you check out that special offer again, we've got that QR code in that link in the description, you will be able to subscribe to everything that Whitney puts out there and as well as getting the special reports, including that commodity super cycle report that Whitney and his team at Stanbury Research are working on. So again, don't miss the special offer to sign up and learn more from Whitney uh when he first gets out these recommendations because that's when the greatest benefits are is when you will find those stock recommendations right away. And Whitney, I I really like this one. This is an interesting one to talk about because we've heard many analysts on the show before talking about moes. And it sounds like this company has a really huge moat. They are the the industry standard and having nearly 100% market share in an industry that is privacy and and those kinds of factors. Uh, sounds like this company has a a really strong future performance just simply because of that moat. >> Yeah. And another nice bonus is the company um today 19 years after it was founded is still run by its founder. Uh, and I always like founderrun companies. >> Yeah. I'm looking at what the analysts have to say about this one too and it does look like there is some upside. There's maybe a little more positive sentiment in the last couple of months on this name. But let's talk about how much growth you could expect as an investor getting in on a software company like Viva Systems right now. Is this going to be a massive growth story? Is this going to be a steady and slow growth story for investors? Uh what do you think about that growth potential? >> This is a company that has historically sort of grown at 20% topline 20% a year. It's now grown bigger. It's got a $33 billion market cap and sitting on almost $8 billion of cash uh no debt. But you know its growth rate has slowed down into sort of the mid- teens and you're going to get that kind of growth in the company's intrinsic value. And then the question is is where does the stock what kind of multiple does the market award to that? And I think at 20 uh for it's basically the the S&P 500 is trading about 22 times uh this year's earnings which is right where Viva is. But Viva is a massively better than average company. And so, you know, given historically it's traded at 60 times earnings, wouldn't surprise me if this traded back to 30 35 times earnings. So, you're going to get an underlying business, you know, growing its value at 15% a year. And even if there's no change in the multiple, that's a reasonable return. But where, you know, I think you get a double out of this in a couple years is the multiple probably isn't going to double from here, but could easily go up 50 60% from here, you know, into the 30s range. Uh, because that's where a super high quality software business should trade. One other question on this one uh in particular. One thing you said early on is that some of the best software companies that have that long-term uh growth potential are the ones that are already starting to implement AI into their software. Do you think that's the case with Viva Systems or because of that privacy issues and the regulation issues, will we not see as much of an AI uh portion of the story? >> I don't think AI impairs the business, but it's not something where I think it's it it's going to be a huge accelerant to the business either. Uh, we'll talk more about, you know, where I think AI could really help in the next next company I want to talk about where I think AI could be a real accelerant. I think it's a neutral to slightly positive here. Um, to own the stock here, you just have to believe that AI isn't going to really impair the business. And I think that's pretty clear. >> Yeah, a really great second stock to look at. Let's get on to that third stock. And this is one that I have lots of personal experience with as I use it just about every day in my job. >> Sure. It's Adobe. Uh, this is one everyone's very familiar with. the most beaten up of the three. Today it trades at slightly less uh than 10 times forward earnings, which is unheard of for a company of this quality that you know historically has traded at 30, 40, 50 times earnings because it's an it's an incredible it's got incredible economic characteristics, but it is a business um you know most most of your viewers here will will know like Adobe Acrobat, you know, ubiquitous and free to just open up a document, but it's its sort of main business is uh content creation. um and you know publishing and and people who are creating posters and uh videos and etc etc. um and here there is competition emerging um the uh you know smaller scrappier companies uh coming up and also AI is dramatically changing the content creation business. Adobe is has more AI risk, but they are also incorporating AI into Adobe and, you know, again, for relatively small cost um for a tool that millions of content creators are very familiar with, are they really just going to switch out to save, you know, $1,000 a year or something? you know, it's it's not that expensive in the context of, you know, what you're what what you're paying the value of of what you're paying for people and the value of the content created. And so, in many ways, I think AI is going to make content creators much more productive. Um, you know, I've talked to business owners who are like, you know, putting together promotional posters and that kind of thing used to take weeks and tens of hours and can now be done in a day. So, but I think it's not clear to me that people are going to rip out the software that they literally grew up with. Uh, I don't think so. And I think you you you're now priced at 10 times earnings. Uh, you you know, at that point, if if Adobe never grows again, if it just simply turns into a low growth cash cow, you're still going to do okay at 10 times earnings. >> Yeah, this is such an interesting one. And again, lots of personal experience on that creative side of it, working with this company and their products. And I I can say uh from a professional standpoint, um the AI tools are there, but they're not up to the quality that a lot of creators want to see. Will they eventually get there? And that's the question, I think, for Adobe. Like you said, there is more AI risk as those AI tools improve, as the the tools that are out there uh get better and the quality gets better. Will more content creators be more willing to switch from the Adobe that they're used to using? Does that make this more of a risk? >> Yes. Um, you know, there's a reason Adobe trades at 9.9 times forward earnings and better insulated companies like Aviva or Service Now are trading at, you know, 22 and 26 times, you know, forward earnings. There's a reason for a much lower earnings multiple. I could see uh Adobe's growth slowing to, you know, high single digits and uh but but that I think that's that's well priced in. This is more of the bottom fishing value investors uh stock pick among these three. Another thing to point out that's similar to the Microsoft discussion we were having earlier is that as you know companies like Adobe that are software companies implement AI tools into their already existing software that companies are used to using uh that you start to use that AI versus searching for that AI solution somewhere else. And so are we seeing that show up in Adobee's earnings right now or even in the stock price action we've seen in this company over the last couple of months? >> I'm just taking a look at the stock chart. I mean, the stock peaked at uh almost uh $700 a share a few years ago, but just um just two years ago was at 600 bucks and it dipped to just under $200, lost twothirds of its value. You know, it's it's bounced back to, you know, 250 range today. But that's still so far off its highs. You know, I don't think it's going to get back back quickly, but this is a stock trading at this multiple. They put up another good quarter or two and people realize these AI fears are overblown. this has more value trap risk of this this could be a melting ice cube. I I would argue this this come if you were to tell me 5 10 years from now which of these three stocks you know is just languishes this would be it. But if you also to tell me which of these stocks doubles in the next 12 months this would be it as well. Um if if they can demonstrate to the market because this thing this thing could even if earnings go nowhere unless this really is a melting ice cube this should trade at 20 times earnings today and it trades at 10 times earnings. So that's a quick double on the stock. >> It's an interesting way to look at this is there's that potential to double. There's the potential for it to go even lower. It just kind of depends on the what we see come out of earnings. And let's talk about what we have seen recently. Uh it doesn't appear that we're seeing a huge change in the subscriber numbers or the money that's coming in. Yes. Um the the numbers are still very strong. They just reported 12% revenue growth which was sort of in line with what it's been historically. you know, the people selling this stock down to 10 times earnings are predicting that there's going to be a fundamental shift in the numbers they've been reporting every quarter for 10 or 20 years now. I love buying beaten down um you super highquality businesses when the market sort of collectively overreacts to the shiny new thing. You know, look back the whole AI bubble reminds me very much of the internet bubble that was the start of my investing career. You know, 20 a little over 25 years ago. people were absolutely right that the internet was going to change the world. Um uh and it did change the world but that didn't uh stop the best stocks uh in that sector the most popular stocks from going down 80 to 100%. You know the Cisco the Lucents the Nortells the um Priceel line.coms you name it Amazon went down by 90% if I recall >> uh 95% I think it went from 400 to 8 if I recall. This was pre-split. Um, so, uh, so I'm seeing that today. I'm super bearish on open AI. Um, I I don't think it ever goes public. And I think when open AI implodes, that's going to impact a lot of companies in the sector, but it will, conversely, when people realize that, yeah, AI is a great and useful tool, but it isn't going to immediately put all the software stocks out of business. In the same way that when the internet bubble came about, you know, traditional retailers like a Home Depot or something like that, you know, their stocks really got beaten up. And it turns out people are still going to Home Depot and Costco. Home Depot, Costco, and Walmart have been three of the greatest stocks the last 25 years. And even despite the rise of online shopping and so forth, now you would have made a lot more money buying Amazon anywhere near the bottom. But um, you know, I think we'll we'll we'll see the same thing with these software stocks. And that when if I'm right that a lot of the bloom comes off the I mean we're seeing I I would argue the first two or three innings of the implosion of the AI bubble and I think software stocks uh as investors sort of sour on the AI bubble that will benefit the stocks that got hit the hardest by the inflation of the AI bubble and and investor over over enthusiasm about that bubble. Yeah, I think that's a really great comparison, Whitney. And that's the first time I've heard somebody compare software companies to retail stores during the dotcom phase of life. And I think that that's a fair comparison. Yeah. To everybody kind of overreacting to people no longer wanting to to go to that retail store or that software company. That didn't end up panning out that way as people predicted back in the 90s. >> Yeah. But again, you know, some retailers did go bankrupt. Uh it's good to have a broad macro theme, but then you need to do good analysis of, you know, which companies will be insulated from these changes and will weather it and and even benefit from it. >> So much good information and some a really good bonus prediction there too on your thoughts on OpenAI. Thank you for sharing so much good details and info with our guest today. Again, if you loved learning from Whitney, make sure to check out that special offer we have right in the description. And if you want to hear a little bit more about that Microsoft discussion, watch this full interview here. We really dove deep into the Microsoft earnings report and kind of what that means for the rest of the software sector too.