Semiconductor stocks started 2024 strong. By July 2024, the iShares Semiconductor ETF (NYSE: SOXX) was up just under 40% YTD. The surge came as a result of massive demand and hype for AI-powered chips. Nvidia (NASDAQ: NVDA) has been at the forefront of the AI-chip race, with other companies like Advanced Micro Devices (NASDAQ: AMD) and Intel (NASDAQ: INTC) trying to catch up.

Despite the ongoing demand for AI chips, semiconductor stocks have seen a significant pullback over the past few months. Meanwhile, other areas within the technology sector, such as software, have taken the reigns and have been outperforming chip stocks in those months since July 2024.

Semiconductors Rally Takes a Breather, Software Heats Up as Investors Search for Opportunities

The biggest issue Nvidia has faced in recent months is the fact that they cannot produce their key chip products fast enough to meet demand. As a result, the company says it has a significant sales backlog for its AI-powered chips and has faced frustrations from its customers as a result. On top of that, Nvidia is facing an antitrust probe from the U.S. Department of Justice, which has only added to the headache for investors. As a result, Nvidia shares have largely been stuck in a trading range between $100 and $130, since late July 2024.

Unfortunately, the more traditional components of the semiconductor industry have not fared as well either due to shrinking demand for PCs and mobile. DRAM manufacturers like Micron Technology (-32% since July 2024) have been down significantly in recent months.

Software stocks, on the other hand, are getting a second look from investors. As demand for alternative investment opportunities away from semiconductors continues to gain favor, software has been a key beneficiary.

Since July 2024, the iShares Expanded Tech-Software Sector ETF (NYSE: IGV) has outperformed semiconductors by a significant margin. IGV has gained 5.3% over that period, while SOXX has dropped 8.8%. This further highlights the rotation the markets have seen away from chip stocks into other areas like software.

Why is software doing so well? Simple. It’s all about the earnings growth. While semiconductors have grabbed the attention with growing orders and demand, software has continued its steady and impressive growth. Now that semis are hitting a temporary wall, investors are once again warming up to software’s steady and impressive growth outlook.

Asure Software’s Earnings Growth Outlook Could Help Stock Grab More Attention

One small-cap software stock that could be getting more attention as a result of the broader shift back to non-semiconductor tech is Asure Software (NASDAQ: ASUR). Asure is an Austin-based provider of human capital management (HCM) solutions primarily to small and medium-sized (SMB) businesses. The company offers its clients a full suite of HCM services that help them attract, retain, and manage top-tier labor talent. This includes everything from job postings to employee wellness solutions and payroll taxes.

Asure’s earnings growth has been impressive over the past several years. The company’s core HCM business saw a top-line revenue expansion of 16% in 2022 from 2021. In 2023, the core business again delivered 19% y/y growth, and management currently projects revenue growth of 23% (excluding ERTC) for the full-year 2024.

Adjusted EBITDA margins have expanded alongside top-line results over those years as well. Full-year 2021 adj. EBITDA margins were reported at 10% before expanding to 12% in full-year 2022. In 2023, the HCM services provider saw bottom-line adj. EBITDA margins ramp up to 20%. For the full-year 2024, management is projecting an adj. EBITDA margin range between 20% and 21%.

Overall, software stocks have found a resurgence in the past several months, as investors look to find alternative opportunities to the once-hot chip stocks. Semiconductors continue to have a strong long-term outlook, but short-term supply constraints, Nvidia’s antitrust probe, and falling DRAM demand are current headwinds. Wall Street analysts continue to see a strong earnings growth outlook for the software industry as a whole. Companies like Asure Software stand to potentially benefit from this attention, as the HCM services provider not only has reported strong top and bottom-line growth over the past several years but is also projecting that growth to continue in full-year 2024.

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