Software Stocks Roughed Up by Downgrades

SAN FRANCISCO -- The software sector was hit by a series of downgrades by sell-side analysts Monday.

Investors accordingly snubbed software stocks on a day when the Dow was down 2.3% and the Nasdaq fell 4.3%. The iShares S&P GSTI Software Index(IGV Quote) was recently off 4.2%.

A bailout plan, if passed by Congress, comes too late to help the sector's third-quarter results, Wedbush Morgan analyst Michael Nemeroff said in a research report Monday. The crisis in the financial markets likely already reduced IT spending.

IT departments often wait until the last days of a quarter to sign contracts.

"Congress' delay in signing a bailout deal last week -- the final full selling week of Q3 -- has caused extreme strain" on third-quarter software sales, making IT buyers more averse to risk, Nemeroff said.

"The financial crisis could have a detrimental impact on spending for the rest of 2008 and possibly negatively impact 2009 budgets," he added.

While not expecting "a precipitous decline in software spending like we saw in 2001-2002," Nemeroff does expect the financial-markets turmoil to take a toll on future IT spending, as new projects are scrubbed or delayed beyond the first half of 2009.

Accordingly, Nemeroff lowered revenue or EPS estimates on Salesforce.com(CRM Quote), SAP(SAP Quote), Informatica(INFA Quote) and Fair Isaac(FIC Quote), among others. Wedbush Morgan makes a market in shares of these firms.

Salesforce.com fell $4.34, or 8.6%, to $46.31 in recent trading. Informatica was off $1.36, or 9.4%, to $13.16. SAP was down $2.98, or 5.2%, to $54.50. And Fair Isaac fell $1.04, or 4.3%, to $23.25.

"Informatica continues to execute well despite a challenging environment," and still merits a buy rating, he said.

RBC Capital Markets analyst Robert Breza lowered ratings or estimates on 13 software stocks, including Citrix(CTXS Quote) and Digital River(DRIV Quote) which dropped to sector perform, from outperform.