Jefferies resets software stock ratings and downgrades four individual stocks

Investing.com - Jefferies has updated its coverage ratings for the U.S. application software sector, highlighting the increasing risk of AI disruption. Four stocks have been downgraded to Hold, while a select group of preferred stocks has been emphasized.

Application software stocks have underperformed broader software benchmark indices, with many declining approximately 30% to 55% year-to-date, compared to a 24% drop in the IGV index. Against this backdrop, Jefferies has adopted a new AI risk framework, combining company-specific fundamentals and catalysts to reassess the sector.

Analyst Brent Thill downgraded Workday, DocuSign, Monday.com, and Freshworks to Hold, citing ongoing risks and weak market sentiment. Regarding Workday, he pointed to execution issues related to leadership changes, stating that “mid-term growth expectations need to be revised downward again.”

For DocuSign, Thill warned that a strong recovery will take time, noting that “there is still a long way to go to achieve double-digit growth re-acceleration,” and that its smart contract management platform still needs to prove its value.

Thill also noted that Monday.com’s outlook “remains uncertain in the SMB and enterprise segments,” and stated that Freshworks faces AI and competitive risks in its core customer experience business.

On the other hand, the analyst believes several vendors are better positioned in their AI transformation. He favors Tech Group, Procore, Atlassian, and Salesforce, citing these companies’ more sustainable business models and internal AI applications that support growth confidence.

Tech Group is Jefferies’ top large-cap pick, benefiting from its extensive data assets and AI deployment across a large customer base. Thill also considers Procore an attractive mid-cap vertical software story, with revenue expected to re-accelerate as macro conditions improve.

Atlassian is seen as a structural beneficiary of the AI-driven coding trend, with Thill noting that more AI-generated code should increase demand for IT collaboration tools.

Meanwhile, Salesforce is highlighted as “the most capable application software provider to implement AI agents,” with successful execution expected to drive broader growth acceleration.

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