Software stocks finished 2024 with a bang, and a Deutsche Bank analyst sees that trend continuing for the sector, minus Adobe.
Stocks including Salesforce, ServiceNow, and Palantir Technologies saw strong returns last year as investors bought up shares of software companies with exposure to generative artificial intelligence. Enterprises are spending big to improve productivity, giving Wall Street optimism on the space.
The Technology Select Sector SPDR ETF rose 20.80% in 2024.
Deutsche Bank’s Brad Zelnick believes this trend will continue in the new year.
“Our conversations with CIOs, industry constituents, and analysis of third-party data indicate the spending environment for software will improve in 2025 vs 2024,” Zelnick wrote in a research note Wednesday.
Zelnick added that monetization of gen-AI is still in its early days, but an “AI halo effect” will help drive revenue dollars. Essentially, the analyst believes excitement over AI software could help bring in new customers, and potentially encourage existing ones to invest more.
Zelnick named Snowflake, ServiceNow, and Zscaler as his top software picks for 2025. Snowflake reported third-quarter earnings and revenue that easily beat estimates in November. ServiceNow raised its full-year guidance in October amid increased investments from customers, and Cybersecurity company Zscaler also raised its full-year guidance in December.
But Zelnick wasn’t as optimistic about Adobe, downgrading shares of to Hold from Buy and slashing his price target to $475 from $600.
“We expect the stock to remain range-bound until the company displays more tangible evidence of AI monetization,” Zelnick wrote. “Though management commentary has continued to exalt the positives and potential of Firefly, we have yet to see the impact on the financials.”
Shares of Adobe were down 1.1% Wednesday to $418.05.
Adobe provided disappointing revenue guidance on Dec. 11. The stock ended the year down 25%, underperforming the sector and notching its sixth worst annual performance on record, according to Dow Jones Market Data.
Adobe didn’t immediately comment on the downgrade Wednesday. However, Chief Financial Officer Dan Durn said in an interview with Barron’s after earnings in December that “we’re literally one year into the monetization journey and it’s making a meaningful impact in the company.”