Warning Shots

July 14th, IBM’s preannounced shortfall resulted in the stock’s worst day in sixty years.

In the letter to investors, the CEO explained that client focus had shifted meaningfully from software to hardware and cybersecurity. The former to get ahead of anticipated price increases; the latter to address rapidly-evolving concerns associated with protecting AI-workloads.

📢 The quiet part out loud 📢

Software is not the priority this quarter.

Money is being allocated elsewhere in a big way.

The response was exactly what you’d expect. Money in stocks flowed to where IBM’s CEO said the money was going: semiconductors and cybersecurity. It fled from select software, not all software.

Caveats

It should be noted that the IGV actually ended that day in the green. Market is no longer treating all software the same. This is a good thing.

Sure, the Microsofts, ServiceNows, and Salesforces of the world didn’t have a great day. Not catastrophic like IBM, but “bad pins” action (sympathy selling) was on display. If you look at this cohort and see opportunity, I must caution you about one more potential bear catalyst on the horizon. IBM still needs to report on July 22nd. Fail to convince the Street a turnaround is in the cards… more will fold.

Before moving on to two notable bright spots, it is worth mentioning this level of shortfall – in the stock and execution – does feel idiosyncratic. Reminiscent of FedEx (FDX) in September of 2022, where their CEO attributed their results to an imminent “global recession” that never materialized. 

Bottom line, I don’t expect IBM-level execution failures to become the norm. Softness will likely show up across similar SaaS names, but not to the same extent. Furthermore, the names we’d be worried about – MSFT, NOW, CRM – aren’t reporting anywhere near their highs. Lower altitude, lower expectations, less room to disappoint. That doesn’t mean there won’t be any post-earnings pain, but I would bet against seeing more blue chip SaaS names lose a quarter of their market cap overnight. 

But why obsess over these names when there are plenty of names across the market working? Since we’re focusing on software, let me direct your attention to two names itching to break out: Toast (TOST) and ServiceTitan (TTAN).

Both are leaders in their niche; both have a hardware component making them much harder to replace by booting up an LLM; both look fantastic. Looking to get in? Wait for them to close above their 200d SMAs, hit the buy button, and set a stop. I’m in TOST; waiting for TTAN.

Happy Trading.

Monday, July 20

Leading Indicators (Jun) | 10:00

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Tuesday, July 21

None Scheduled

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Wednesday, July 22

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Thursday, July 23

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Friday, July 24

American Express (AXP) | BTO

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