Needham analyst Mike Cikos noted tariff exposure in his Infrastructure Software coverage is better insulated compared to other sectors due to the U.S.’ dominant position in Software and the vast, cheap distribution afforded by Software.

Cikos noted that any potentially competing tariffs or ‘Buy Domestic’ programs from other countries have a limited impact.

However, the analyst expected an indirect knock-on effect to his coverage as companies re-prioritize initiatives globally.

Also Read: Tariffs To Impact End Demand: Goldman Sachs Analyst Expects Drag On Corporate Spending, Hiring

As deployed resources ensure supply chain resiliency or dual-sourcing, they inherently diverge from other initiatives despite secular demand drivers such as Cloud, generative AI, and Digital Transformation remaining intact.

In this environment, Cikos noted that Nutanix, Inc. (NASDAQ:NTNX), Pure Storage, Inc. (NYSE:PSTG), and Confluent, Inc. (NASDAQ:CFLT) (in that order) are likely to face a tougher lift, as these vendors are asking potential customers to undergo a paradigm shift.

Nutanix sells a Hyperconverged Infrastructure offering, which requires the customer to obtain the underlying hardware before deploying Nutanix’s Software.

Cikos noted that Pure Storage and Confluent’s biggest challenge is contesting the status quo of continuing to purchase hard disk drives or utilizing batch processing.

International countries’ attempts to enforce tariffs or buy homegrown offerings will likely have a limited effect. A ‘Buy Domestic’ approach to Software would face significant challenges as there are relatively few powerhouse vendors in Europe (e.g., SAP (NYSE: SAP)).

Furthermore, in the unlikely event Software vendors faced International tariffs, Cikos noted his coverage could offset these headwinds through price increases. As a result, the analyst noted his coverage’s direct exposure as limited in scope.

However, Cikos expected an indirect knock-on effect on his Infrastructure Software coverage as the C-suite and executives prioritize initiatives globally, such as dual-sourcing or remapping supply chains.

Despite continued demand behind secular drivers like Cloud, generative AI, and Digital Transformation, if a retailer needs to ship shirts, optimizing procurement has risen to a mission-critical initiative compared to deploying a new database for improved TCO.

Companies’ rebalancing and re-prioritization of initiatives are likely to freeze budgets and extend sales cycles.

Cikos stated that software vendors will have an easier time up and cross-selling existing customers than acquiring new logos. But this has been the case for 2-3 years, where many companies are already sourcing the vast majority of incremental Revenue from existing customers.

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