Jefferies Analyst Brent Thill on a 'Mullet Year' for Software Markets

The 'Mullet Year' Analogy for Markets

• 💇 The 'mullet year' metaphor describes a market with a slow, uncertain first half ('business up front') followed by a potentially stronger second half ('party in the back').
• 🗓️ This outlook is based on hearing that many deal decisions in the tech sector are being pushed out into the latter half of the year.
• 📉 Jefferies has cut price targets across their software coverage, impacting major companies like Microsoft, Meta, Amazon, Alphabet, and Snowflake due to a softening macro environment affecting deal-making.

AI's Current Impact and Future Potential

• 🤖 While AI is expected to have an impact later in the year, current expectations for AI in software are too high.
• 📊 Currently, less than 5% of total revenue for most software companies is related to AI.
• 💡 Clients are largely in a 'wait and see' mode, preferring to buy software stocks after Q1, with the software index already down 7% year-to-date.

Factors Influencing Software Sales

• 🤝 A potential reduction in government employees and a focus on efficiency could eventually help software sales as companies need to get jobs done with fewer resources.
• 🚫 Companies are not yet seeing significant impacts in Small and Medium-sized Businesses (SMBs) or enterprise sectors, with 'no decisions' being a prevalent outcome.
• 広告 Advertisers may also freeze ad campaigns due to tariffs and economic uncertainty, delaying decisions until Q2 or Q3.

Capital Expenditures and Efficiency

• 💰 Capital expenditures (CapEx) for hyperscalers are not expected to be massively cut but are shifting towards efficiency.
• 📈 Microsoft, for example, saw CapEx increase by 97% last quarter and is now projecting a 10-15% increase for the next year, focusing on Return on Investment (ROI) for initial AI investments.
• 🚀 The current phase is about efficiency for AI, getting initial investments operational, and then companies will lean back into CapEx once they see revenue and referenceability from AI projects.

Recommended Software Names

• 🏢 For the back half of the year, large-cap names like Microsoft and Oracle are favored.
• 📈 Mid-cap recommendations include Monday and Procore, with Procore noted for improving efficiency in the construction industry.
• 🛡️ Cybersecurity names like CrowdStrike and CyberArk are considered more defensive plays.