Software Stocks Wake Up — Is the Selloff Over?

Key Concepts

• VIX (Volatility Index): A measure of market expectations of near-term volatility conveyed by S&P 500 index option pricing.
• UOA (Unusual Options Activity): Significant and potentially predictive trading volume in options contracts, often signaling institutional investment or anticipation of price movements.
• NIL (Name, Image, Likeness): The ability of college athletes to profit from their personal brand through endorsements and other opportunities.
• Yen Carry Trade: A strategy involving borrowing in Japanese Yen (historically low interest rates) to invest in higher-yielding assets elsewhere.
• Salary Cap (NFL): A limit on the total amount of money NFL teams can spend on player salaries.

Market Volatility and Macro Trends

The discussion began with an assessment of current market conditions, characterized by significant volatility. Justin noted the VIX’s consistent struggle to sustain levels above 20, despite periods of market stress, observing a pattern of peaks followed by rapid declines. He referenced John’s recent analysis highlighting the need to withstand drawdowns, but emphasized the VIX’s limited staying power above the 20 threshold. Pete echoed this sentiment, acknowledging the recent spike to 23 but noting its swift reversal.

Pete highlighted an interesting counter-trend: strong retail inflows into the software sector during periods of decline, suggesting resilience and opportunity despite negative sentiment. He pointed to positive performance across various sectors – Disney, Nike, Home Depot, American Express, Microsoft, Cisco, and Amazon – indicating a broader, albeit uneven, market recovery.

Debunking the Yen Carry Trade Narrative

Justin strongly refuted the prevalent narrative surrounding the Yen carry trade as a significant driver of market risk. He stated the trade’s peak value was around $200 billion (comparable to T-Mobile’s market cap) and had largely unwound. He criticized media commentators for perpetuating the narrative despite its limited impact, labeling it a “dead” and misleading argument. He emphasized that the claim the Yen carry trade would crash the NASDAQ was unfounded, as it hadn’t done so even at its peak.

Potential Acquisition Targets (2027)

A significant portion of the discussion focused on identifying potential acquisition targets, particularly within the software and data center spaces. Justin highlighted prediction markets indicating interest in GitLab and, more prominently, companies in the data center sector. He specifically mentioned a company with significant contracts (potentially with Microsoft) and partial ownership by Nvidia (11%), possessing a strong balance sheet. He noted unusual options activity (UOA) in Nebius Group (NBIS) as a potential signal of acquisition interest, with a temporary spike in acquisition likelihood to 80-90% based on substantial buying activity. He stressed that UOA should be monitored as a potential indicator of impending M&A activity.

Stock-Specific Analysis

Several individual stocks were analyzed:

• Upwork: Experienced a 18-20% decline following weaker-than-expected short-term guidance, despite a positive long-term outlook. UOA revealed significant put buying, suggesting investors anticipated the drop, which proved accurate. Justin speculated the money leaving Upwork might flow into other software stocks with better guidance.
• Credo: Benefited from raised Q3 guidance and strong momentum, jumping 15%. Revenue growth was reported at 200% year-over-year. The stock had already bounced before the news, indicating underlying strength. A follow-up conference call was scheduled to provide further clarity.
• Data Dog: Experienced a 10-15% surge after beating earnings expectations. Pete highlighted the stock’s rapid recovery from a previous 50% pullback, demonstrating the potential for quick gains in volatile sectors.
• Spotify: Benefited from better-than-expected monthly active user (MAU) and premium user growth. The stock mirrored the positive trend observed in Credo and Data Dog, suggesting a broader recovery in the software sector. Justin contrasted the positive sentiment with Michael Burry’s bearish signal (a head-and-shoulders chart), questioning the validity of overly negative narratives.

Prediction Markets & Super Bowl Halftime Show

The discussion touched on prediction markets, specifically regarding the viewership of the Super Bowl halftime show featuring Bad Bunny. The market settled around 40-50 million views within the first day. A counter-programming stream featuring Kid Rock garnered approximately 20 million views as of February 9th.

NFL & College Football – The Role of Money

Pete transitioned to a discussion of sports, focusing on the NFL and college football. He emphasized the importance of the NFL’s salary cap in maintaining competitive balance, preventing dominance by teams with the deepest pockets (unlike leagues like baseball). He noted the significant cap space available to teams like Washington, New England, and Tennessee, enabling them to pursue free agents.

Regarding college football, Pete expressed concern about the increasing influence of money through NIL deals, arguing it had opened a “Pandora’s Box” and essentially legalized practices previously considered illegal. He highlighted the substantial financial resources available to programs like USC, Oregon, and Alabama, driven by factors like market size and donor support.

Notable Quotes

• Justin: “If I have to hear one more idiot talk about the yen carry trade, I'm going to pull my hair out.”
• Pete: “They love to sell fear as [laughter] Yes, they do.”
• Justin: “You can’t hate the player, you can’t hate the game either. You just got to play the game if you want to win the game.”

Synthesis/Conclusion

The conversation painted a nuanced picture of the current market landscape. While acknowledging volatility and recent setbacks in the software sector, both Justin and Pete identified signs of resilience and potential opportunities. They cautioned against succumbing to fear-mongering narratives (like the Yen carry trade) and emphasized the importance of analyzing underlying data and unusual options activity. The discussion highlighted the potential for M&A activity in the data center space and identified several stocks (Credo, Data Dog, Spotify) exhibiting positive momentum. Finally, the segment on sports underscored the pervasive influence of money in both professional and collegiate athletics, with the NFL’s salary cap serving as a model for maintaining competitive balance. The overall takeaway is a call for informed, data-driven investment decisions and a healthy skepticism towards sensationalized market commentary.