Mizuho TMT specialist names top software pick into year-end

Investing.com -- Mizuho TMT specialist Jordan Klein is making Microsoft his top software long into year-end, citing the potential for Azure to surpass 50% growth as additional capacity comes online.

Klein's conviction is built on several overlapping positives: Azure acceleration, cleared FY27 guidance that had hung over the stock, and a commitment to staying free-cash-flow positive that he calls a "big deal."

On the AI front, he sees asymmetric upside through Microsoft's relationship with OpenAI: "If OAI does anything good, MSFT benefits. If MSFT able to do anything internally better in AI, MSFT benefits a lot."

Klein also highlights the company's status as a year-to-date laggard within the Magnificent 7, arguing that the Mag 7 cohort broadly "acts better into yr end." That relative underperformance, combined with what he views as a reasonable valuation, makes the setup more compelling than the louder names in software.

As he puts it, Microsoft is not one of the most "exciting long ideas right now, but it offers attractive combo of OFFENSE & DEFENSE that sets up well into an uncertain midterm election cycle with oil/Middle East risks remaining elevated."

The endorsement arrives against a software rally that Klein treats with considerable skepticism. In his view, the sector's recent surge is more mechanical than fundamental.

"My buyside feedback past 2 weeks suggests moves like yesterday feel much more due to passive rotation and quant buying vs active buyers chasing with FOMO," he wrote.

He traces the origin of the move to June, when long/short funds piled into semiconductor longs and used software as the short hedge to stay balanced.

"Software generally got way oversold in June as L/S funds wanted to chase or stay long Semis that went up every day and forced them to add short exposure to stay hedge. They clearly chose SOFTWARE for the short hedge."

He flags that the sector has slid into an "'all news is good news' mentality" — a condition he views as fragile. Q2 results were broadly better than feared, he concedes, but HubSpot and Monday.com actually missed.

Buyside investors, Klein notes, are themselves confused by the rally's breadth, questioning sharp moves in names like Adobe, Paycom, UiPath, RingCentral, and Atlassian.

On the crowded end of software, Klein sees diminishing returns. Infrastructure and cybersecurity names, Snowflake, CrowdStrike, Cloudflare, Twilio, Datadog, and Palo Alto Networks, remain heavily owned with no signs of investor capitulation.

"I just do not see or hear about investors wanting to sell these names," he writes, but adds that "the upside potential in some of these looks less exciting up here if you ask me."

He also questions whether the recent moves in ServiceNow and Oracle can hold, citing buyside feedback and sentiment as his reservations.

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