Tech stocks have already had a strong year, but one corner of the sector has more “appealing” opportunities in store for investors, according to Goldman Sachs. Software stocks that Goldman covers have already soared 37% in the year to date, said the bank in a July 21 note. But the investment bank expects they’ll go even further. “We remain constructive [long term] given the potential for a compounding of multiple factors, including a cyclical recovery, pricing, Gen-AI product cycles, and continued margin expansion in the years ahead,” it said. Goldman added that software companies are more “adequately set up to outperform” in the second quarter and for the rest of the year. “As the macro environment continues to steer towards a soft-landing … forward guidance now looks de-risked on a sector level. This sets the stage for a potential return to the more normalized beat-and-raise cadence typically associated with software companies,” the bank’s analysts said. Six software stocks Goldman said these stocks still offer strong investment opportunities: Adobe , Salesforce , Monday.com , Microsoft , ServiceNow , Workday . “With Gen-AI presenting a strong top-line tailwind, we also see many of these names re-rating higher given below-average EV/FCF multiples,” Goldman said, referring to the ratio between enterprise value and free cash flow. Here’s their average upside to price targets given by analysts covering them, according to FactSet. Rising interest in generative artificial intelligence has prompted companies to reevaluate their IT budgets and investments in “next-generation solutions,” Goldman noted. That could lead to more software spending in key areas that may have otherwise been scrapped as a result of tighter budgets, it said. Goldman said the focus is likely to shift to a seasonally strong fourth quarter. “Over the last few quarters, companies like Microsoft, Salesforce and Adobe referenced decreased appetite for larger, transformational deals. This will likely lead to pent-up demand, some of which can materialize in 4Q as companies reassess their IT budgets and digital needs,” it said. — CNBC’s Michael Bloom contributed to this report.
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