'Dramatic downside' risk in some software stocks still, says VantageRock's Avery Sheffield
Summary
- Markets are trading at historically high valuations (S&P 500 >20x P/E), creating a fragile environment where stocks must perfectly live up to expectations.
- A major bifurcation is occurring within the Software sector: "Dramatic downside" exists for high-multiple stocks facing AI disruption (specifically cybersecurity), while deep value exists in profitable, low-multiple software companies.
- Data center and semiconductor demand remains robust for the year, but the trade direction hinges on upcoming Nvidia earnings and memory pricing trends.
Trade Ideas
"Demand does continue to be very strong... we're going to see very strong data center spending at least this year." She also notes "memory prices going up dramatically." The fundamental capex cycle for AI infrastructure is intact and accelerating. However, the trade is crowded. The direction of the entire Nasdaq depends on whether these companies can beat elevated expectations in upcoming earnings (specifically NVDA). WATCH. While fundamentals are bullish (strong spending), the speaker explicitly refuses to "make a call" until seeing if earnings justify the current price levels. Political hurdles or financing issues slowing down data center build-outs.
Avery Sheffield
Co-Founder and CIO, VantageRock
"The markets are still trading at well over 20 times... That's one of the very highest percentiles versus history. So stocks are expensive." At these valuation levels, there is no margin of safety. The market is "going along not breaking out," suggesting upside is capped by valuation while downside risks (tariffs, hiring freezes, AI disruption) are accumulating under the surface. AVOID broad index exposure in favor of stock-specific selection. A "melt-up" scenario driven by liquidity or AI euphoria.
Avery Sheffield
Co-Founder and CIO, VantageRock
"A lot of software companies are still trading at infinite earnings... 40, 50, 60, 70, 100 times on forward earnings. If there's any chance that the terminal value is at risk, there's dramatic downside." She specifically notes headlines about "Anthropic and a new cyber security solution" negatively impacting stocks. AI is moving from a buzzword to a deflationary force for specific software verticals. If AI agents (like Anthropic's) can replace complex cybersecurity or SaaS tools, the "terminal value" of these high-multiple companies approaches zero. The market is currently pricing them for perfection, ignoring the existential obsolescence risk. SHORT high-valuation, unprofitable software and cybersecurity firms vulnerable to AI displacement. AI disruption takes longer to materialize; interest rate cuts reignite risk appetite for long-duration assets.
