Ahead of the Bell: Software sector downgraded

In a client note, Tim Klasell predicted that the sector will not outperform in the next year. Companies in the sector include Microsoft Corp., Oracle Corp., Akamai Technologies Inc. and McAfee Inc.

Klasell is not the first analyst to weigh in with increasingly negative sentiment on software companies. On Thursday, Goldman Sachs analyst Sarah Friar upgraded shares of Digital River Inc. but downgraded shares of NetSuite Inc. and CommVault Systems Inc.

Klasell said that checks show software spending has weakened, and he thinks a lot of software sellers and their channel partners will have a hard time meeting their sales goals in the current quarter.

"Looking into the seasonally strong fourth quarter, we would not be surprised to see the typical hockey stick replaced with a croquet mallet--namely, end-of-year budget flushes may not be as strong as in prior years, especially among vendors who's implementations are strained by a lack of available financing," he said.

The analyst noted, though, that while the sector is now trading in line with the S&P 500, infrastructure software "is inherently mission- and business-critical," so companies can put off buying some new software, but certain maintenance and purchases must be made.

Because of that, over time he thinks the stocks "will regain a premium valuation compared to the broader market."