Trade Tracker: Malcolm Ethridge buys more ServiceNow
Speakers
Summary
Malcolm Ethridge of Capital Area Planning Group explains why he is buying more ServiceNow, arguing the stock has reached peak pessimism and is growing into its valuation. The Halftime Report panel debates the trade, with Joe cautioning on falling knives like Oracle and saying he would tactically sideline ServiceNow on weak momentum. Joe also highlights a hedge-fund negative correlation trade favoring semis over software, while Steve favors cybersecurity over the broad software group.
- Malcolm Ethridge says he is adding to ServiceNow after a 40% decline and a new 52-week low.
- He argues ServiceNow's moat is protected by CTO/CISO reluctance to adopt new AI startups and that earnings and free cash flow are growing into valuation.
- Joe warns against buying falling knives like Oracle and says he would step to the sidelines on ServiceNow until momentum returns.
- Joe describes a hedge-fund negative correlation trade favoring semis (SMH) over software (IGV), calling the divergence extreme.
- Steve cautions against buying the whole software group, citing AI-driven internal software development and software-PE bias.
- Steve prefers cybersecurity, saying it will bottom first.
- The panel debates whether ServiceNow's selloff is an opportunity or a momentum trap.
Ideas
Avoid Oracle, falling knife with no bounce.
He is wary of buying falling knives in names that show no bounce, explicitly citing Oracle as an example of a stock that lacks rebound momentum.
Buy ServiceNow on peak pessimism.
ServiceNow has likely reached peak pessimism after falling roughly 40% over the past year and hitting a new 52-week low. The moat is strong because CTOs and CISOs are reluctant to introduce new AI startups that claim to disrupt the data/software space. Although valuation has been questionable for years, earnings and free cash flow are growing, so it is growing into its valuation and becoming more attractive technically. He sees this as a great place to build a position.
Hedge funds press semis over software.
There is a very clear negative correlation trade in the hedge fund community right now, with funds pressing the direction toward semis and away from software. The divergence between chips (SMH) and software (IGV) has been extreme for about 60 days, and he highlights this as an active trade setup.
Hedge funds press semis over software.
There is a very clear negative correlation trade in the hedge fund community right now, with funds pressing the direction toward semis and away from software. The divergence between chips (SMH) and software (IGV) has been extreme for about 60 days, and he highlights this as an active trade setup.
Tactically sideline ServiceNow until momentum returns.
He does not disagree with Malcolm's long-term fundamental case on ServiceNow, including that Bill McDermott and management will execute, the balance sheet is strong, and revenue growth is appealing. But he looks at the stock through a momentum lens and would probably step to the sidelines at some point; when momentum reappears, he still views ServiceNow as a quality software name to own.
Favor cybersecurity; avoid broad software group.
He does not think investors should buy the whole software group because AI now allows people without coding training to build their own software applications, and large companies including investment banks are building software internally. He is also cautious on software-focused private-equity firms like Thoma Bravo and Vista Equity Group because they have a natural bias when saying now is the time to buy software. He favors cybersecurity, which he thinks will bottom first.
Favor cybersecurity; avoid broad software group.
He does not think investors should buy the whole software group because AI now allows people without coding training to build their own software applications, and large companies including investment banks are building software internally. He is also cautious on software-focused private-equity firms like Thoma Bravo and Vista Equity Group because they have a natural bias when saying now is the time to buy software. He favors cybersecurity, which he thinks will bottom first.
