Investing.com -- Wells Fargo expects software stocks to rebound in the second half of the year as macroeconomic concerns ease and enterprise technology budgets normalize, but recommends investors remain selective through the summer.
In a mid-year update, the bank said volatility marked the first half of 2025, with tech shares swinging sharply and investor frustration mounting over the slow contribution from artificial intelligence.
The firm noted its coverage has broadly returned to end-2024 levels, despite gains in major indexes like the NASDAQ Composite and iShares Expanded Tech-Software Sector ETF (NYSE:IGV).
A survey conducted by Wells Fargo (NYSE:WFC) pointed to weaker IT spending growth in the first half, up just 2% year-on-year, but highlighted continued resilience in cloud infrastructure, cybersecurity, and generative AI initiatives, particularly in customer service.
Microsoft (NASDAQ:MSFT) emerged as the top vendor, with over half of respondents expecting to increase spend.
AI revenue monetization remains limited across most of software, the note said, but activity in the data space is picking up, with new SaaS data platforms and acquisitions gaining momentum.
Wells Fargo raised its price targets on Microsoft and Snowflake (NYSE:SNOW).
The bank sees better seasonal demand benefiting smaller-cap software names in the second half, and upgraded Kenvue (NYSE:KVUE) to Overweight and DocuSign (NASDAQ:DOCU) to Equal Weight, while downgrading Dayforce and GitLab.
It continues to favor companies undergoing business model transitions, including SAP and Autodesk (NASDAQ:ADSK).
Wells Fargo upgraded Zscaler (NASDAQ:ZS) to Overweight and raised its price target to $385, citing the company’s potential to reach $5 billion in annual recurring revenue by fiscal 2027.
The bank expects over 20% billings growth in fiscal 2026 and sees margin expansion continuing alongside revenue growth.
Zscaler’s shares, it said, remain undervalued relative to peers like CrowdStrike (NASDAQ:CRWD).