Software stocks are making a comeback, lifted by the artificial intelligence trade. We’ve seen that in two places in particular: stocks of companies selling “infrastructure” software, meaning, tools to build things, and cyber-security stocks. 

Wednesday, I met with a company doing both. Software maker JFrog is known principally as a tool for programmers to manage what’s called a “binary” file. When a programmer is done writing code, they push the compile button, and their instructions are converted into a machine-readable file, a collection of ones and zeros, hence, binary. The binary is what the microprocessor executes to run the program. 

JFrog keeps those binary files organized and protects them from mischief and corruption as programmers are working.

In February, JFrog, along with many software names, looked to investors like a casualty of multiple new software offerings from Anthropic and OpenAI. A consensus took shape that traditional tools would be rendered obsolete as the AI giants just re-created it all with “agents.” Stocks swooned.

What a difference six months has made. JFrog stock is up 113% since then at a recent $87.60.

We got another ample serving of software firms reporting Thursday evening, and I’m delighted to see that Samsara, a name that was in the TL20 up until this past March, has gotten a strong response to its healthy report, up almost 14% in pre-market trading at $44. Price targets are rising to as high as $55 this morning. ‍ ‍

Samsara makes software and hardware sensors that allows fleets of vehicles to be remotely directed (more here.)

However, Samsara has mostly gotten favorable responses in past to earnings only to see its stock slip later on, as I have noted before. The shares have been trailing the market this year, up just 8% prior to last night’s report.

The cloud computing giants, Amazon, Microsoft, and Alphabet, have been joined by a second-tier cohort of companies that are chasing opportunity where the giants leave crumbs on the table.

Some of those crumbs are now sizable. By serving up AI capabilities, for example, CoreWeave, the best known of the so-called neoclouds, has amassed a backlog of $104 billion, it said last month. Its larger competitor, Nebius Group, has $40 billion of backlog. These have overnight become substantial operations.

And some think they will take an even more prominent role.

“We would like to go win more neoclouds,” says Rajiv Ramaswami, CEO of software maker Nutanix, in a chat we had last week. “I think they are a great alternative to hyperscalers in terms of making GPU capacity available to the enterprise easily.”

It’s another funny evening of earnings Wednesday similar to Tuesday night, with even decent reports being sold off. That includes Broadcom, down 1%, and Hewlett Packard Enterprise, which is benefitting from artificial intelligence just like Dell Technologies but not seeing the same stock gain tonight.

The star of the evening, I’m happy to report, is TL20 stock to consider Snowflake, its shares up 23% in late trading at $376.60, adding to a 39% year-to-date gain prior to the report.

BROADCOM’S CEO HELPS THE NEEDY

The hyperbole in AI is really something else these days.

Back in June, there were two issues of concern for Broadcom. One was pressure on gross profit margin, the other was CEO Hock Tan’s soliciting hedge funds Apollo and Blackstone to finance his customers Anthropic and OpenAI.

UPDATE: Palo Alto Networks’s after-hours gain Tuesday night has melted away, the stock down 2.5% at $353.07 in early trading. That’s in spite of analysts raising their price targets as high as $450. Catharine Trebnick of Rosenblatt Securities, who has a Buy rating on the stock, attributes the sell-off to worries about gross profit margin. She notes that the company’s “Cortex” product, which is the root of its security management practice, and a showcase for Palo Alto’s AI efforts, has a lower gross profit margin than the traditional application firewall business at Palo Alto.

Bulls advise staying the course. Remember, Palo Alto had nearly tripled this year heading into the report.

Shares of Dell Technologies have given up a little of their gains overnight, but the stock is still up 8% in early trading at $460.55. Price targets on Dell this morning are going as high as $650 at Bernstein, which would be a 41% gain from here.

The really big gainer of the evening turns out to be GitLab, whose shares are now up 22% in early trading at $55, with price targets zooming to as high as $70 at Canaccord Genuity.

We continue to be in earnings season proper, and this week features an all-star cast of winners this year, the average return to date being a 42% gain. See the table below for the full lineup.

Dell reports this evening, up an amazing 248% this year as the AI data center race has put major fuel into its server sales, and the profit picture for those servers, despite lower profit margin than conventional servers, has turned out much better than many people thought, myself included. 

Dell competitor Hewlett Packard Enterprise, also riding the wave of AI servers in a way similar to Dell, reports Wednesday evening. Its shares are up 114% this year.

Also Tuesday night, Palo Alto Networks, the biggest of the cyber-security vendors at $311 billion in market cap, will report amidst a very healthy climate for security names, as we saw just last week from reports by peers CrowdStrike and Okta. Palo Alto is up a perfectly respectable 96% this year. 

It’s a slow Monday — for me, at least — and, so, I’m reaching back into some of last week’s high-level commentary, some of which is useful for assessing stock prospects.

RENAISSANCE OF MEMORY CHIPS

I’ve been a fan of Micron Technology for a while now, based on the contention that the technology of memory chips, including both DRAM and NAND flash, are essential to processing artificial intelligence. I think that view is becoming conventional wisdom more and more.

However, I think most investors don’t realize just how fervent, how incredibly active this market for memory is, a veritable renaissance of the field.

There’s just so much going on in the memory-chip market between Micron, its nearest competitors, Samsung Electronics, SK Hynix, Japan’s Kioxia Holdings, Sandisk, and also whatever Nvidia and its partners Taiwan Semi and Intel are up to on any given day.

In a thirty-four-page report last week, Bernstein analyst Mark Li goes into some of the very technical details of all the different kinds of memory chips, including something that Nvidia is pushing called “storage next,” which is a sort of hybrid of the best qualities of DRAM and of NAND.

Years ago, Nvidia’s co-founder and CEO outlined what I would call “The Total System,” where computers talk only to computers, with no humans in the loop. It’s one of the reasons I believe he’s looking beyond OpenAI and Anthropic and other AI leaders to the enduring value of chips.

In addition to Nvidia’s stellar report Wednesday evening and Salesforce’s big announcement with Anthropic, covered this morning, we continue to have several software names reporting Thursday night, and it continues to be a return to favor for the software group.

The results are in line with my general observation in this week’s podcast, which is that “infrastructure” software, including tools to build and manage applications, and tools for cyber-security, continue to be the best opportunity in software.

Also this evening, shares of chip maker Marvell Technology, which competes with Broadcom, are down 6% in late trading. I think that’s essentially profit-taking. The report and outlook were strong, but the shares had been up 184% since the start of the year.

Wednesday evening’s earnings conference call with Nvidia, CFO Colette Kress and CEO Jensen Huang was a little bit like the May, 2023 report that stunned the world.

That report three years ago gave investors the first sense that artificial intelligence was becoming an arms race that would hugely reward Nvidia.

Wednesday night, CFO Kress forecast the company’s sales to grow seventy percent in 2027 (actually the fiscal year that ends in January of 2028.) Kress never makes annual forecasts, only quarterly, so, the analysts on the call were surprised.

Price targets Thursday morning are soaring to as high as $515 from Raymond James’s Simon Leopold. “Will Nvidia be a greater than $1 trillion and $25 per share company in 2029?” Pierre Ferragu asks.

And the hyperbole is flying in these reports. Just the titles: “Remember the titan” (Bernstein); “A second Nvidia moment” (Rosenblatt); “A year of visibility” (Wedbush); “The Emperor Strikes Back” (Jefferies.)

(0:10) My recurring theme is a “renaissance” in semiconductors, and, I'm gonna say it once again: it's all about the chips — still.

(0:40) Consider that one of the best performing things this year is the Philadelphia Semiconductor Index, the “SOX,” the benchmark index of chip stocks, up 63% this year.

(0:50) The chip-heavy TL20 group of stocks to consider, curated by yours truly, is only up 53% through Monday, though I’m not complaining.

(1:24) An important recent example of the chips: I took a trip last week to Silicon Valley to see the newest offering from Cerebras Systems, which competes with Nvidia in AI chips. 

(3:01) The Cerebras “Wafer-Scale Engine” is a chip the size of an entire semiconductor wafer. They also build entire computer systems around that chip.

After all that’s happened with Nvidia in ninety days — offering its own balance sheet to back OpenAI’s dreams; inducing financial types to “securitize” the sale of AI chips; SpaceX saying that it will commit to Nvidia as its sole AI chip supplier;   continued raging demand for all chips; and CEO Jensen Huang touting his favorite stocks such as Marvell — this Wednesday evening brings another earnings installment from the company.

The question, once again, with Nvidia, is whether even very favorable results can do anything for a stock stuck in neutral.

Nvidia shares closed down three points Monday, at $208.48, now declining seven days in a row. The stock has gained just under 13% for the year, basically tracking the market despite continued positive reports from the company. 

Elon Musk has achieved a reputation as making the impossible come true. However, the larger his ambition, the more his promises seem to be pushed far out into the future.

There are no “Optimus” robots selling to customers, and the world is not filled with Tesla robo-taxies, despite high expectations for both.

Therefore, it’s reasonable to cast a skeptical eye on the latest outsized promise from Musk, the contention his Starlink broadband service inside of SpaceX will become the U.S.’s fourth largest cell phone operator next year.

To date, Starlink is a constellation of “low-earth-orbit” satellites that deliver either broadband connections to a customer premise, or a mobile service that fills in dead spots around the world — specifically, 7.4 million mobile users in thirty countries as of the end of June.

The question mark is Musk’s ambition to go way beyond that nascent mobile service.

I’ve been on the road a few days, and have finally had a chance to settle back into the corporate earnings groove. Thankfully, this is a less-intense week of reports. (See the chart down below.)

Two TL20 names, Analog Devices and Keysight, delivered excellent reports but their stocks fizzled. This is the equivalent of a Broadway show or a box office feature that gets rave reviews from the critics but fails to catch on with the general audience. However, both stocks have performed very well this year, so, it’s perhaps not a surprise that they didn’t get a pop their numbers.

Alibaba, the Chinese e-commerce giant, is an important read on the AI trade because Alibaba’s cloud computing division is such a large and fast-growing part of the business and it includes many offerings that are linked to AI. Chinese AI models have been increasingly competitive with the top U.S. offerings for several years now.

The company reported June-quarter results Thursday morning.

Monday and Tuesday, I was in San Francisco attending the unveiling of a new AI computer by Cerebras Systems, a company that has fascinated me for almost a decade.

I had a chance to meet with CEO and co-founder Andrew Feldman and his team on Monday in a small group press session, and Tuesday was the general reception for media, customers, partners and others. I heard there were three thousand RSVPs for the festivities, which took place at The Midway, a concert venue on the San Francisco Bay waterfront. At Tuesday’s event, there was a line around the block to get in hours before the start, which is a nice indicator of the momentum the company has.

The big challenge for Cerebras for its next computer was to maintain its edge in speed against The Leading Brand, Nvidia’s GPUs. It seems to me they accomplished that, and also set themselves up for meaningful improvement in profitability by boosting the economics of their products.

Things keep getting weirder in the artificial intelligence market. 

Following Nvidia’s announcement last week that they are partnering with BlackRock and other financial firms to securitize AI chip rentals, the company on Monday announced it will underwrite a portion of a massive data center in Ohio that is to be used by OpenAI.

This is a rather astounding push by Nvidia to leverage its balance sheet — over $120 billion in cash and equivalents — to both drive chip sales and to create more distance between itself and competitors. Is it worth gambling with investors’ money to encourage future chip sales? I have my doubts.

According to Nvidia, the main obstacle to AI’s growth these days is “land, power and shell,” or, LPS, as CEO Jensen Huang refers to it in his blog post accompanying the announcement. (The shell is the physical structure of a data center, the building itself.) Huang aims to be the one to resolve that impasse.

(0:41) It's been two weeks since the last podcast because I needed that much time to reflect on the two biggest weeks of earnings season, with 274 companies of note having reported thus far.

(1:14) During this earnings season, we have also gotten more evidence of the tenuous nature of the artificial intelligence trade even though AI-linked stocks have rebounded. 

(1:46) The AI-heavy TL20 group of stocks to consider is up 14% for the month of August after a sell-off of about 10% in July, with a rise of 7% this past week ended August 14th. That’s a 64% gain for the year. 

Software maker Procore Technologies, which sells programs that help general contractors manage the construction business, is looking to transform itself after twenty-four years in business.

The person charged with the financial part of that transformation is chief financial officer Rachel Pyles, who took over from Howard Fu in April and is committed to making Procore “best in class” in software. A key first step in that direction is taking the company’s adjusted (non-GAAP) operating profit margin from 19% this year to 25% next year.

“That 25% still isn’t best in class, it’s just a meaningful step forward in getting there,” Pyles tells me in a conversation we had following the company’s earnings report July 29th.

Pyles has a ways to go to reach best-in-class: Microsoft, for example, which reported the same day as Procore, has an operating margin of 45%. Pyles tells me 25% is merely a “milestone,” a way to frame things because “I get a lot of interest from investors,” she says, who are asking her, “’Hey, we hear you, you can get to these best-in-class margins, but, when are you going to get there? How are you going to get there?’”

Shares of both Cisco Systems and Cerebras Systems are sharply lower Thursday in spite of upbeat results and outlook in their Wednesday evening reports.

Cerebras shares are down 13% at $228.92, still below the first-day close of its May 14th initial public offering of $311.07. Cisco shares are down 9% at $113.26 after what had been a 61% rise this year heading into Wednesday evening’s report.

I had originally thought the sell-off was merely about expectations being too high for both. In a sense, that is true, but the deeper concern is that global shortages of everything are constraining what the companies can deliver.

This was only Cerebras’s second quarter since coming public. The results were again strong, with sales of $210 million ten percent higher than expected and the net loss 74% smaller than expected. The outlook for this quarter is stronger as well, and the company teased that it will be able to triple its revenue next year.

But, Cerebras clearly could have sold more in the quarter if not for data center and chip-production limits.

As explained by Cerebras’s CFO, Bob Komin, the company faces constraints in a number of areas.

Oh, they just keep coming, the earnings reports, with another eighty or so worth consideration this week. 

The headline report from Tuesday evening is that of CoreWeave, whose shares are higher by 18% on Wednesday at $107.25, after the company comfortably beat expectations and raised its annual forecast for revenue as its backlog of AI hosting soared once again. (See the table at the bottom of the post for this week’s reports so far.)

CoreWeave is pushing up just about everything that’s AI-linked today. The AI-heavy TL20 group of stocks to consider is up 4% this morning, lead by big gains in Bloom Energy, Sandisk, Seagate, Lumentum, and Micron Technology.

The numbers from CoreWeave were better than expected, but nothing astounding: Revenue came in a percent ahead of expectations, the smallest revenue upside since CoreWeave started reporting in May of last year. The company mildly raised its revenue outlook for the year.

But, the huge jump today is not about reported upside, it’s about the fact the business continues to grow, defying the fear that had been circulating last month about Meta Platforms entering the GPU rental market and crushing CoreWeave

Nvidia shares ended fractionally lower on Tuesday at $217.50 after the company announced an agreement in principle with multiple financial partners, including BlackRock, to raise $500 billion in debt to fund the deployment of chips, including purchases of Nvidia’s GPUs.

Much as I love Nvidia as a company and investment, my hope is that this speculative effort fails to find many takers and fizzles.

I had the same reaction when chairman Masayoshi Son of SoftBank Group announced a half-trillion-dollar fund for AI data centers in January of last year, called Stargate. I called it “mainly a photo op” for U.S. president Donald Trump, Son, and his partners in the deal, principally Oracle chairman Larry Ellison, and OpenAI CEO Sam Altman.

Nobody talks much about Stargate these days. The effort ran into trouble quickly after being announced last year, and the Financial Times’s Tim Bradshaw and colleagues related in May that the initiative has basically faded away. 

Thank goodness for that. 

Dear reader, how well I remember walking the streets of New York City on July 3rd, reporting on the many who waited hours or even days in line at an Apple Store or an AT&T shop to be the first to have the first iPhone. 

Honestly, I had forgotten that it has been almost twenty years. And, apparently, the anniversary next July could be an unhappy one for Apple’s stock, according to Jefferies & Co.’s  Edison Lee, who Monday cut his rating on Apple stock to Underperform from Hold. 

Keep in mind, predicting disasters for Apple’s forthcoming products has proven very tricky for analysts.

Lee’s focus is the rumored “all-glass” iPhone model expected next year as a twentieth-anniversary celebration.

In case you have been under a rock, Bloomberg’s Mark Gurmanreported a year ago, and MacRumors’s Hartley Charltonstudiously summarized last week from that reporting, a description of an iPhone made of glass that “wraps around” all four sides of the device, something that sounds like a kind of “infinity pool” of a screen.

I’ve thought a lot this year about what happens if all the plans for artificial intelligence investment fail to show up. What if the financing doesn’t come through as expected? What do AI companies do if they build data centers and they can’t sell all the capacity? What happens to the chip makers if they suddenly find orders being cancelled?

It’s refreshing to talk with Paddy Srinivasan, CEO of software maker DigitalOcean. He’s contemplated the negative scenarios as well, and he admits there are “known unknowns.”

“There will be a 1999,” Srinivasan observed in a chat he and I had via video last week. “Now, how do we survive that?” He was alluding to the plunge in the Nasdaq Composite as the DotCom bubble burst. (Actually in March of 2000, but the reference is clear.)

“Are we in 1998 today or are we in 1996? Nobody knows, right?”

Rather than “party like it’s 1999,” Srinivasan has been performing what amounts to a delicate balancing act. He is both courting the whales, such as software startup Courser (in the process of being acquired by SpaceX for $60 billion), while also avoiding being dependent on them by building an enduring base of smaller customers who come for continually increasing capabilities in AI.

Thursday evening was a good one for multiple software names, mostly of the programming tool or infrastructure sorts, as you can see from the table at the bottom of this post, in which I’ve highlighted the software stocks in blue. The average return of software names following their report this week is 9%, better than the 6% average for all stocks reporting.

Bear in mind, I’m still tabulating!

Among names surging Friday morning are Twilio, whose CEO I interviewed last night; and JFrog, which sells tools to check the quality of programming code, is one of the vendors that was hit the hardest back in February when Anthropic’s Claude Code Security debuted and seemed like it would mean the end of all traditional coding tools.

Shares of software maker Twilio are surging by 16% in late trading Thursday, at $225, as the company once again hit milestones in CEO Khozema Shipchandler’s pledge to boost the company’s growth and profitability.

Revenue growth keeps rising, up 22% last quarter versus 13% growth a year ago, the company reported this evening. And the free cash flow margin continues to expand, reaching 24% last quarter versus 21% a year earlier.

Shipchandler was kind enough to talk with me following the report as he has done six times previously. (See the sidebar.)

What’s clear to me is that Shipchandler has an opportunity to expand the company’s offerings in artificial intelligence now that he has stabilized and vastly improved the company’s financials.

“It’s very early days that, you know, but we have aspirations in governance and observability” of AI programs, says Shipchandler.

The AI “token” disaster I wrote about in May is hitting companies hard — specifically, hitting their budgets really hard, according to Yamini Rangan, the CEO of front-office software maker Hubspot.

Her company’s stock is plummeting Thursday morning after the company’s Wednesday evening earnings report came up short because companies are trying to control runaway AI budgets and getting pickier as they do so.

This is one of the biggest concerns I’ve had about the software group: not that they would be made obsolete but that so much distraction would emerge from the whole AI push inside of corporations that it would destabilize the traditional commercial software market. We’re seeing that play out now.

WHY SANDISK WILL BE OKAY

Among the AI-linked names, few have had as rich a year as Sandisk, makers of NAND flash memory chips, whose stock is up 469% this year at Wednesday’s close of $1,350.50. However, the shares are down 11% this morning after the company’s revenue forecast Wednesday evening came up shy of consensus at $10.55 billion versus $10.8 billion. This is the first time the company has disappointed with its revenue outlook since it came public in February of last year as a spin-off of Western Digital.

In addition to SpaceX’s very mixed report Tuesday evening, earnings results overnight featured continued strength from Advanced Micro Devices and Arista Networks, and some surprising positives for the software group, including Shopify, Kaltura, Dynatrace, while other software makers that have already been under pressure, such as Criteo and CS Disco plummeted.

Dynatrace, one of the tools vendors in “DevOps” that I highlighted in this week’s podcast, is having a better time today than back in May.

With Dynatrace, we now have two of the five names I mentioned on the podcast, including DigitalOcean, yesterday, delivering positive results.

AMD shares are down six points at $487.30 despite a very strong report. The shares had been up 142% since the start of the year, so, I regard this really as profit-taking and nothing to do with any issues in AMD’s business, which continues to get stronger and stronger.

Tuesday, the day of SpaceX’s first quarterly report as a public company, was a funny trading day. The stock gained 9% in regular trading, lifted by the overall positive attitude about all things AI, to about $125. But then it gave up 8% in after-hours as the report came out, retreating to $115 and change and continuing to trail the offer price of $135 of the June initial public offering. 

The stock continued to fall this morning, down 11% at $111.07.

The headline is that the company beat expectations. The key element, however, for many, is capital spending that came in a lot hotter than expected, and looks set to go much higher from here.

Palantir shares are seeing the biggest after-hours/pre-market gain since February of last year, up 15% at $144.45 following on Monday evening’s report, and estimates and prices targets are likely headed higher Tuesday.

The company beat on every metric that mattered to the bullish types, results that are unique in the software industry.

My sense is Palantir is being helped as investors trade out of AI competitor SpaceX, whose shares have lost a third of their value since the IPO in June. SpaceX was likely direct competition for Palantir shares, and the movement of money into SpaceX stock doubtless contributed to a 29% drop in Palantir leading up to this afternoon’s report. I sense the curse of SpaceX has now lifted from Palantir, allowing investors to focus on the fundamentals.

We’re past the heaviest two weeks of earnings, but we have tons more reports to come. The cloud giants, Amazon, Microsoft, and Alphabet, have signaled continued spending even as their backlog swells, providing support for the AI trade. Software companies have turned in a very mixed performance, with cyber-security being the one bright spot. This week features the traditionally most expensive stocks in tech such as Palantir and Astera Labs, but also the tools makers that are riding the AI wave such as Datadog and Digital Ocean. And, special mention of AXT, whose wafer sales are a remarkable new chapter in its forty-year history.