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The stock market is witnessing a significant sell-off this month. The Nasdaq Composite Index has dipped more than 10% to trade below its 50-day moving average. It is too early to say if this is short-term market correction or the beginning of a larger move lower. But this selling spree has created an opportunity to buy legacy software stocks at discounted prices.
The COVID-19 pandemic has accelerated the adoption of digitization. Not all software companies will survive the pandemic, as companies are reducing their IT spend on non-essential software. But they are prioritizing their spending on cloud computing, digital transformation, and artificial intelligence.
The software-as-a-service (SaaS) market is highly competitive with many companies offering similar products. Over time, the market will consolidate, and only the ones with a large customer base will survive. The big players in this space, like Microsoft Corporation (MSFT), Adobe Inc. (ADBE), and SAP SE ADS (SAP), have the advantage. They have been in the software market for over 40 years and created a large installed base that is generating stable recurring cash flow.
Microsoft Corporation (MSFT)
Founded in 1975 by Bill Gates, MSFT made Windows operating systems a household name. Like all legacy software companies, MSFT transitioned from …
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