In this piece, we will take a look at the top nine short software stock positions among institutional investors according to Jefferies.
With the close of 2024 approaching fast, artificial intelligence continues to set the narrative on Wall Street. The tail end of October marks the start of another highly anticipated earnings season, which for the most part, will continue to be dominated by AI. On the hardware front, investors will be on the lookout for whether the demand for AI GPUs is sustaining and if the firm that is the market leader is also improving its margins and profitability. For software stocks, investors will pour over profitability data to determine whether the billions of dollars invested in training and testing AI as well as in business partnerships are yielding results.
For software stocks, their exposure to AI is so strong that it has divided the 2024 stock performance of some firms into neat halves determined by investor sentiment about their AI products. One such AI software stock ranked 5th on our recent list of AI stocks that insiders are selling. Looking at its year-to-date share price performance, it’s rather neatly divided into two halves that converge on June 13th. Year to date on June 13th, the shares were down 19.8% even though the firm’s fiscal 2023 revenue was a cool $19.4 billion and had grown by 10% annually. Before that eventful day, the firm’s first quarter had seen it grow revenue by 11% annually but struggle to keep costs low and profit margins high.
Yet, the investor bearishness surrounding this well-known provider of productivity software tools such as Photoshop and Reader, would change in the blink of an eye. From June 13th to the third week of October, the shares have reversed course and gained 8.5%. In fact, between the 13th and September 12th, the stock had gained 27.9%. June 13th was the day that this firm reported its second-quarter earnings. The results led to its shares jumping by 13% in aftermarket trading, with investors impressed by the fact that the firm increased full-year guidance to range between $21.40 billion and $21.50 billion from an earlier $21.30 billion $21.50 billion.
The optimism was driven in part by the firm’s Creative Cloud business which includes products such as Acrobat Pro, Photoshop, and Express. The AI addition to Creative Cloud was the firm’s set of generative AI models dubbed Firefly. Management shared that Firefly was at the heart of the ARR guidance bump to $1.95 billion as they shared:
“We’re excited about the accelerating pace of innovation across the Digital Media business and pleased with the adoption of AI functionality as well as its early monetization across Document Cloud and Creative Cloud, including our flagship applications, Firefly Services and Express. We’re pleased to raise our annual net new ARR target to $1.95 billion and excited to deliver on our rich product roadmap in the second half.”
With AI profitability driving the second-quarter earnings season, investors were naturally ecstatic and sent the stock higher.
However, the June respite would be short-lived as the shares tanked by 13.4% in September. As usual, AI was the culprit. The downward trend started in the form of a 9.2% drop in after-market following the firm’s third-quarter report. It saw the company guide Q4 revenue at a midpoint of $5.525 billion which fell below the $5.61 billion analyst consensus.
While this firm is a consumer and professional software stock, the broader software as a service (SaaS) industry hasn’t been spared by the AI-driven Wall Street trends either. SaaS and software stocks are predominantly valued through two metrics: the Rule of 40 and EV/Sales (or variants such as EV/EBITDA or Price to Sales). These multiples are somewhat unique to the software and SaaS stock narrative as they evaluate the firms based on their ability to grow. This is key since one of the main reasons behind SaaS stock popularity is that they do not have to deal with inventory, logistics, or supply chain issues like other businesses.
In the AI era, SaaS valuation multiples and revenue growth estimates have been severely compressed. Data shows that the median price to forward sales SaaS multiple is 5.5x right now. The valuations are driven by lower growth expectations. After AI and the decimation ushered in by high interest rates, just 1% of SaaS and software companies have a 12-month future revenue growth rate higher than 30% as of June 2024. Digging deeper, investors have also placed a higher premium on growth as while firms with a Rule of 40 score greater than 40 have a median EV/Sales multiple of 8.9x, those with a growth rate greater than 30% but a Rule of 40 score lesser than 40 have a median multiple of 11.6x.
These AI-driven software shifts, precipitated by worries of a reduction in SaaS demand due to businesses self-developing software using AI have also affected investor sentiment. According to Jefferies’ latest Trading Positioning Survey, 19% of institutional investors were overweight on software stocks as of October 2024, a sharp drop over July’s reading of 28% and January’s 51%. Yet, investors have also tempered their short positions as Jefferies shows that 54 software stocks were shorted as of October compared to 73 in July.
A supply chain employee uses the company’s secure supply chain management software to update their customer’s records.
Our Methodology
To make our list of Jefferies’ top overcrowded software short positions, we ranked the top nine crowded short positions from the latest Trading Positioning Survey by their shares short as a percentage of outstanding shares.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
9. Oracle Corporation (NYSE:ORCL)
Number of Hedge Fund Holders In Q2 2024: 93
Shares Short % Of Outstanding: 0.61%
Oracle Corporation (NYSE:ORCL) is an enterprise resource computing software products provider. The firm allows businesses to manage their supply chain, manufacturing, financial, and other processes. It is one of the biggest companies in the world, with total assets of a whopping $140 billion and cash and equivalents of $10 billion. These have enabled Oracle Corporation (NYSE:ORCL) to secure a key role for itself in the artificial intelligence industry via its Oracle Cloud Infrastructure (OCI) business division. OCI, as the name suggests, targets the infrastructure portion of the AI market. It provides firms such as Tesla with GPUs to test and train their machine learning and AI models on. Oracle Corporation (NYSE:ORCL) benefits from having a sizeable inventory of NVIDIA GPUs under its belt and aims to allow users to access more than a hundred thousand NVIDIA Blackwell GPUs next year. On the software front, Oracle Corporation (NYSE:ORCL) is the world’s second largest ERP software company through its 18.4% market share.
Janus Henderson mentioned Oracle Corporation (NYSE:ORCL) in its Q2 2024 investor letter. Here is what the fund said:
“Enterprise software company Oracle Corporation (NYSE:ORCL) was a top contributor to relative performance. The company reported revenue and bottom line metrics that were in line to slightly below consensus; however, it also reported record bookings for new business. This accelerating revenue growth outlook is being driven by AI cloud infrastructure deals and boosted sentiment in the stock.”
8. Atlassian Corporation (NASDAQ:TEAM)
Number of Hedge Fund Holders In Q2 2024: 47
Shares Short % Of Outstanding: 1.28%
Atlassian Corporation (NASDAQ:TEAM) is an enterprise software firm known in the industry for its Jira software that allows businesses to manage products. It also provides other software products such as Bitbucket that enable coder collaboration. Atlassian Corporation’s (NASDAQ:TEAM) trailing twelve-month revenue is $4.36 billion, and since the firm does not turn a profit, the narrative is based on growth and cost control. The shares are down 14.5% year to date, and several factors are driving investor pessimism. Atlassian Corporation (NASDAQ:TEAM) is currently in the midst of customer migration to its cloud platform from its server platform, which can lead to customer losses. Additionally, it has struggled to control costs with a guided EBITDA margin of -6% for fiscal year 2025. However, the firm is aggressively targeting the AI-driven SaaS industry by moving full speed ahead with its Rovo platform. Rovo aims to introduce AI into the business data analytics and decision-making process and could unlock additional revenue for Atlassian Corporation (NASDAQ:TEAM).
Baird Chautauqua International and Global Growth Fund mentioned Atlassian Corporation (NASDAQ:TEAM) in its Q3 2024 investor letter. Here is what the fund said:
“Atlassian Corporation’s (NASDAQ:TEAM) cloud revenues were the focus again this quarter as its cloud revenue growth was lower than guided. Cloud migration was slower due to the complexity of migrations. We remain positive on the long-term opportunity for the company from continued migration, paid seat expansion, pricing, and new customer acquisition.”
7. Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Holders In Q2 2024: 107
Shares Short % Of Outstanding: 1.48%
Adobe Inc. (NASDAQ:ADBE) is the software company that we discussed in depth in our introduction to this piece. If you’ve read the intro, you’d know that subscription-driven revenue and sustained customer growth and retention are key drivers of the firm’s hypothesis. Adobe Inc. (NASDAQ:ADBE)’s shares have provided a mixed bag of performance in 2024 as they have seen multiple ups and downs due to shifting investor sentiment related first to its ability to integrate AI in its product portfolio and then its ability to generate a profit from its AI offerings. Consequently, Adobe Inc.’s (NASDAQ:ADBE) Firefly platform is central to its hypothesis and investors are watching with eagle eyes for any signs of increasing or decreasing profitability. The firm is making some interesting moves in AI lately, as it plans to train millions of people worldwide to use AI by 2030 and expand Firefly’s video capabilities.
Polen Capital mentioned Adobe Inc. (NASDAQ:ADBE) in its Q2 2024 investor letter. Here is what the fund said:
“With Adobe, in some ways, we see it as a microcosm of the market’s “shoot first, ask questions later” approach to categorizing AI winners and losers. In the early part of last year, Adobe came under pressure with a perception that generative AI (GenAI) would represent a material headwind to their suite of creative offerings. In short order, the company introduced its GenAI offering, Firefly, which shifted the narrative to Adobe as a beneficiary with a real opportunity to monetize GenAI in the near term. Earlier this year, that narrative was again challenged as the company reported a slight slowdown in revenue growth. Results in the most recent quarter were robust as the company raised its full-year forecast across a number of key metrics and showcased better-than-expected results.”
6. Salesforce, Inc. (NYSE:CRM)
Number of Hedge Fund Holders In Q2 2024: 117
Shares Short % Of Outstanding: 1.72%
Salesforce, Inc. (NYSE:CRM) is one of the biggest customer relationship management software product providers in the world. It held a 21.7% share of the market in 2023, which provides the firm with access to sizeable data resources. These are key in the artificial intelligence industry, and Salesforce, Inc. (NYSE:CRM) is leveraging its strengths, too. The firm offers customers an unbelievable 8 trillion data points to run their AI campaigns and makes Salesforce, Inc. (NYSE:CRM) one of the more important firms when it comes to leveraging AI in the advertising industry. Yet, since it’s a SaaS company, it has to deliver on growth and cost control or otherwise falter no matter how many data points it offers. Consequently, Salesforce, Inc. (NYSE:CRM)’s shares are up by a modest 12.6% year to date, as they recover from the massive 19.7% drop in May. This drop was in the aftermath of the first fiscal quarter earnings report, which saw Salesforce, Inc. (NYSE:CRM) miss $9.17 billion of analyst revenue expectations by posting $9.13 billion. The higher end of its Q2 guidance of $9.25 billion also missed consensus estimates of $9.37 billion. Investor concerns about growth slowdown persist, as Salesforce, Inc. (NYSE:CRM) struggles with tight budgets and longer sales cycles.
Salesforce, Inc. (NYSE:CRM)’s management shared details about its plans to increase deal value during the Q1 2025 earnings call:
“Data Cloud gives every company a single source of truth and you can securely power AI insights and actions across the entire Customer 360.
Now let me tell you why I’m excited about Data Cloud and why it’s transforming our customers and how it’s preparing them for this next generation of artificial intelligence. Data Cloud was included in 25% of our $1 million plus deals in the quarter. We added more than 1,000 data cloud customers for the second quarter in a row. 8 trillion records were ingested in the Data Cloud in the quarter, up 42% year-over-year and we processed 2 quadrillion records, that’s a 217% increase compared to last year. Over 1 trillion activations drove customer engagement, which is a 33% increase year-over-year. This incredible growth of data in our system and the level of transactions that we’re able to deliver, not just in the core system but especially in data cloud is preparing our customers for this next generation of AI.”
5. Zscaler, Inc. (NASDAQ:ZS)
Number of Hedge Fund Holders In Q2 2024: 45
Shares Short % Of Outstanding: 3.18%
Zscaler, Inc. (NASDAQ:ZS) is a midsized cybersecurity firm. Its products enable businesses to access externally managed applications without compromising their cybersecurity, ensure data protection in public clouds, and conduct identity management along with other IT operations. It is one of the worst-performing software and SaaS stocks this year as the shares are down 12.3% year to date. Central to Zscaler, Inc. (NASDAQ:ZS)’s woes are slowing growth and reliance on large contract sizes. This was evident after the firm’s fiscal fourth-quarter earnings release that saw Zscaler, Inc.’s (NASDAQ:ZS) shares drop by 18.9% as its outlook for the first half of fiscal year billings guidance was disappointing. Zscaler, Inc. (NASDAQ:ZS) tried to make up for this by guiding aggressively for the second half, but this only led to analysts wondering whether the firm could keep up with the heightened expectations. Consequently, the stock’s fate depends on Zscaler, Inc.’s (NASDAQ:ZS) ability to grow its billings and diversify its contract base.
Yet, these contracts also provide Zscaler, Inc. (NASDAQ:ZS) with a strong customer portfolio. Here’s what management shared during the Q2 2024 earnings call:
“I am pleased with the progress we’re making in transforming our go-to-market engine to an account-centric sales motion, which is contributing to growth of our large customers. We added nearly double the number of global 2000 logos in fiscal ’24 as compared to fiscal ’23.
We ended fiscal ’24 with approximately 35% of global 2000 companies and more than 40% of Fortune 500 companies as our customers. Our customer base spending $1 million plus annually grew by 26% year-over-year to $567 million and we ended the quarter with over 60 customers spending $5 million plus annually. We expect this large customer momentum to continue in fiscal ’25. Finally, I want to address the topic of cloud resilience that has come to the forefront due to the recent cloud outages of Microsoft and CrowdStrike. When customers rely on a mission-critical cybersecurity service, there’s no room for service interruptions. From inception, Zscaler has built a cloud security platform that has been seamlessly scaling with high-reliability and resilience.
Operating such a service is no trivial task and requires years of experience. Unproven vendors, including new entrants and legacy firewall companies, do not have this experience. By operating the world’s largest security cloud with superior resilience for over a decade, we have earned the trust of the largest enterprises. This is a clear differentiator for us and is driving the growth of our business. As an innovator and a market leader, in January 2023, we became the first cloud security company to introduce a business continuity service that enables customers to continue their operations even during catastrophic events. In conclusion, we are uniquely positioned to benefit from the confluence of two large secular growth drivers, Zero Trust security and AI.”
4. Snowflake Inc. (NYSE:SNOW)
Number of Hedge Fund Holders In Q2 2024: 69
Shares Short % Of Outstanding: 3.93%
Snowflake Inc. (NYSE:SNOW) is one of the biggest data warehousing companies in the world. It holds a 22% market share, which makes the firm a key player in today’s AI-driven industry since copious amounts of data are needed to train AI models. However, Snowflake Inc. (NYSE:SNOW) is one of the worst-performing software stocks in 2024 as its shares are down a whopping 38.9% year to date. The troubles started in 2024 when Snowflake Inc. (NYSE:SNOW)’s fiscal first quarter guidance of $745 million to $750 million missed analyst estimates of $760 million. The shares fell despite the firm beating revenue and profit estimates, and it underscored the criticality of growth for any SaaS firm’s hypothesis. Snowflake Inc. (NYSE:SNOW) tried to address this in August when it increased full-year revenue guidance on the back of AI. But, the shares fell by an additional 14.7% as the company did not project improving costs. Consequently, leveraging its size and scale to grow in the AI industry will continue to drive Snowflake Inc. (NYSE:SNOW)’s hypothesis.
Baron Funds mentioned Snowflake Inc. (NYSE:SNOW) in its Q2 2024 investor letter. Here is what the fund said:
“Snowflake Inc. is a leading cloud data platform that is predominantly used for data analytics. The stock declined 16.4% as investors evaluated the impact of a recently announced CEO transition, an investment cycle driven by spend on AI, a cybersecurity incident, and a rapidly changing competitive environment. With GenAI capturing a larger portion of the public discourse, Snowflake’s positioning in the future data stack is under scrutiny by both investors and customers. We believe Sridhar Ramaswamy, the newly appointed CEO, can help the business more efficiently transition toward an AI-first world. While Databricks and other key competitors are presenting strong results, we believe Snowflake’s brand, existing customer base, and accelerating product innovation should allow it to continue to capture share in a relatively large and strategic market. Management continues to describe strong demand trends for its core data analytics, which is also demonstrated by the relatively healthy expansion rates among existing customers while new go-to-market initiatives can help grow the customer base further. Longer term, we remain excited about the Snowflake’s strategic opportunity as the data platform for its customers.”
3. CrowdStrike Holdings, Inc. (NASDAQ:CRWD)
Number of Hedge Fund Holders In Q2 2024: 69
Shares Short % Of Outstanding: 4.12%
CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is a well-known cybersecurity software provider that rose to fame earlier this year after its faulty software update led to an unbelievable 8.5 million computers going offline worldwide. The outage also flipped the firm’s narrative, as the shares lost more than 42% of their value over the next two weeks. However, CrowdStrike Holdings, Inc. (NASDAQ:CRWD) has managed to control some of the damage from the outage as its shares are up 24.9% year to date and 41.6% since the post-outage bottom. Part of the recovery is based on easing investor worries of customer loss as CrowdStrike Holdings, Inc. (NASDAQ:CRWD) might be able to prevent fallout due to high switching costs. Investors will nevertheless be on the watchout for customers jumping ship, and they will also monitor CrowdStrike Holdings, Inc. (NASDAQ:CRWD)’s fiscal 2031 recurring revenue guidance of $10 billion and midpoint free cash flow margin of 36%.
Baron Funds mentioned CrowdStrike Holdings, Inc. (NASDAQ:CRWD) in its Q2 2024 investor letter. Here is what the fund said:
“CrowdStrike Holdings, Inc. is a cloud-architected SaaS cybersecurity vendor offering endpoint security, threat intelligence, and cyberattack response services. Shares continued their strong performance from the first quarter and were again a top contributor, rising 19.5% in the second quarter on better execution than peers in the broader security space. The company reported strong quarterly results with 33% year-over-year revenue growth, driven by customers consolidating their cybersecurity spend on CrowdStrike with free cash flow margins reaching 35%. With accelerating market share gains in its core endpoint detection and response offering, emerging products including Cloud, Identity, and SIEM reaching material scale, and newer products in data protection and AI ramping quickly, net new annual recurring revenue and total revenue look to sustain a long duration of growth. With its leading competitive positioning in cybersecurity, the growing threat landscape (which is also driven by the advancements in AI, making hackers more dangerous), its unique lightweight, single-agent, architecture, and its platform approach, we retain conviction in CrowdStrike, which is emerging as the security platform to beat in terms of scale, profitability, and free cash flow conversion.”
2. Palantir Technologies Inc. (NYSE:PLTR)
Number of Hedge Fund Holders In Q2 2024: 44
Shares Short % Of Outstanding: 4.36%
Palantir Technologies Inc. (NYSE:PLTR) is a data analytics software provider that caters to the needs of the public and private sectors. It is one of the best-known players in the national security software market, and the firm has also been growing its presence in the US commercial market. On the commercial front–and particularly in today’s AI era–Palantir Technologies Inc. (NYSE:PLTR) benefits from the fact that it has set up teams that work directly with customers to assess their needs and develop specific solutions. This is important for software firms particularly in the AI era as firms might find it difficult to tailor AI to their specific needs. Palantir Technologies Inc. (NYSE:PLTR)’s approach has yielded results as well since the software company grew its commercial revenue by 70% in the second quarter. This was on the back of lucrative deals, with Palantir Technologies Inc. (NYSE:PLTR) adding 96 contracts worth more than $1 million each and 27 contracts worth more than $10 million each.
Scout Investments mentioned Palantir Technologies Inc. (NYSE:PLTR) in its Q1 2024 investor letter. Here is what the fund said:
“The top contributor to return for the quarter was Palantir Technologies. Sentiment improved on Palantir after it reported stronger than expected commercial customer revenue and free cash flow. U.S. commercial growth was especially encouraging, as U.S. commercial revenue was up by a large percentage year over year for the fourth quarter and U.S. commercial customer count grew nearly as much. We expect Palantir to become one of the premier artificial intelligence (AI) software providers, built on its Foundry and AIP platforms.”
1. MongoDB, Inc. (NASDAQ:MDB)
Number of Hedge Fund Holders In Q2 2024: 54
Shares Short % Of Outstanding: 4.58%
MongoDB, Inc. (NASDAQ:MDB) is a database as a service (DaaS) company that provides businesses with software to store and manage their data. Its shares have struggled this year and are down 31% year to date. This is because MongoDB, Inc. (NASDAQ:MDB) has struggled to maintain investor optimism surrounding growth. The kick-off started in May when the firm’s first-quarter results guided Q2 revenue and EPS at $462 million and $0.47. These missed analysts estimates of $470 million and $0.58, respectively. Investors were also left worried by the fact that MongoDB, Inc.’s (NASDAQ:MDB) full-year guidance only promised a 12% growth for a visible slowdown over last year’s 57%. However, this doesn’t mean that the firm is down and dusted when it comes to growth as its Atlas database platform is one of the fastest-growing products in the market courtesy of its 30%+ growth rate. Therein lies MongoDB, Inc. (NASDAQ:MDB)’s biggest weakness too as any headwinds faced by Atlas could translate into hefty stock underperformance.
MongoDB, Inc.’s (NASDAQ:MDB) management commented on its growth during the Q2 2024 earnings call:
“Starting with consumption of existing applications on our platform, this is where we have historically seen a macro impact as usage of applications is impacted by the underlying business conditions of our customers. As we discussed on our last earnings call, in Q1, we did see broad-based consumption growth slowdown, suggesting some macro softening. Our usage trends suggest a similar macro-environment in Q2 as in Q1, even though Q2 Atlas consumption growth was modestly ahead of our expectations. Moving on to new business, we generally have not seen the macro-environment impact our ability to win new business, and that was true in Q2 as well.”
MDB is a software stock institutional investors are shorting according to Jefferies. While we acknowledge the potential of MDB as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MDB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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