Investors continue to flee enterprise software stocks, and it’s too early to call a bottom within the group, CNBC’s Jim Cramer said Thursday.
reason? Kramer said it’s impossible to tell how much investors are willing to pay for these companies’ future earnings as long as the market is concerned that artificial intelligence will disrupt once-loved business models.
Kramer referred to the price-to-earnings ratio, which he said is the “secret sauce” to understanding how stocks are traded. It measures how much investors are willing to pay for each dollar of future profits.
“Can the market ever be wrong? Of course, it’s always wrong,” Cramer said on “Mad Money” after a tough trade in software stocks. But, he continued, “Can we stand in front of the freight train of shrinking price-to-earnings ratios? Probably not now, and probably not yet.”
“If we start to see how low the multiples can go and bottom out in the near future, these might be worth buying because we’re dealing with great companies. Right now, that doesn’t seem to matter, but I’m sure this won’t last forever.”
If a company is growing rapidly and investors are confident in its earnings trajectory, they are generally willing to pay a higher P/E. When investors lose confidence in future growth, the P/E ratio gets compressed. That’s exactly what’s happening across software right now.
Kramer says the offspring of this dynamic is ServiceNowwhich fell 9.9% on Thursday despite a better-than-expected earnings report and a major share buyback announcement Wednesday night. ServiceNow stock has fallen about 49% over the past year. iShares Enhanced Technology Software Sector ETF It fell about 11% over the same period. In contrast, the S&P 500 is up about 15% over this period.
“The revenue is not the problem. The problem is … what people will pay for that revenue,” Kramer said.
ServiceNow’s price-to-earnings ratio has shrunk dramatically, dropping from the high 60s in January 2025 to the low 40s in April and continuing to decline from there. After Thursday’s collapse, ServiceNow trades at a forward P/E of just under 28 times.
“(The plurality) can be brutal. It’s like a vote, a referendum, and somehow (ServiceNow CEO Bill McDermott was voted out of the island),” Kramer said of ServiceNow’s CEO. “The stock market is saying, ‘Bill, you’re not going to get anything.'”
Kramer emphasized that his assessment of ServiceNow’s future is not as harsh as the market’s, noting that McDermott appeared on “Mad Money” the night before and told a compelling story about the company’s ability to thrive in an AI-driven world.
“So the question is not whether ServiceNow will continue to be profitable. I think it will be. But that’s not the question,” Cramer said.
“We can’t fight the market’s decision, so at least for now we accept the market’s decision,” he added. “It’s too strong.”
