Not All Software Companies Will be Taken Out by Artificial Intelligence
Within the past year, software stocks have gone from market darlings to all-out pariahs. After years of premium valuations supported by low interest rates, predictable recurring revenues, and the promise of endless digital transformation, much of the sector has experienced a sharp and indiscriminate selloff.
But in some cases, valuations across enterprise software companies have compressed meaningfully, even as the underlying business lines continue to grow, generate positive free-cash-flow, and deepen customer relationships. Now, under the surface, are a few hidden gems that long-term investors might want to bear in mind.
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The current narrative is that coding tools developed and powered by artificial intelligence (AI) will eventually drain the moats that companies like Salesforce, Adobe, and Workday have worked so hard to fill over the past few decades. Investors are betting that at some point, large and medium-sized enterprises will be able to make their own customized versions of these companies’ flagship offerings at a lower cost—bypassing premium software subscriptions altogether.
Ironically, the current environment mirrors the shift to cloud software over two decades ago that ushered in the software as a service (SAAS) model that many of these companies operate under today. In this instance, the big, incumbent customer relationship management software providers of the 1990s were eventually taken out by Salesforce.
Those companies were dominant until Salesforce proved that cloud-based software, delivered inside a browser rather than on a server in a closet or a basement, was the wave of the future. And now, Salesforce is the company most analysts expect to be upended by agents like Cowork from Anthropic.
But some enterprise software providers continue to see steady contract renewals and expanding usage within large organizations, even as their stock prices imply a far more pessimistic future. That disconnect between market sentiment and financial reality is often where longer-term opportunities begin to emerge. Presently, this is a market where fear, rather than fundamentals, is doing most of the decision-making.
For example, ServiceNow is a company that acts as the air-traffic controller that routes work across a company’s various systems and standardizes its processes. Its shares are down more than 35% this year alone, yet it is growing revenues by roughly 20% annually, had strong free cash flow growth above 30% in 2025, and is trading close to its lowest valuation—as a multiple of expected sales—in a decade. There seems to be a mismatch between financial characteristics and market sentiment.
Microsoft has also traded down more than 25% from its most recent high in October amid fears that the future of its software business is uncertain. While the software segment does account for approximately half of the company’s overall profits, Microsoft has an “install base” of approximately 400 million paying enterprise customers who are unlikely to jump ship. Additionally, through its recently announced partnership with Anthropic, the company will soon have access to the very agentic coding tools threatening to challenge it.
If companies are now expected to use agents to execute work on behalf of humans rather than using software to get work done, we will inevitably see an increase in cybersecurity spending. As agents become empowered to take over a worker’s entire computer and use their actual credentials to access apps autonomously, cloud-native cybersecurity companies like Crowdstrike, Zscaler, or Netskope are perfectly positioned to meet that new demand.
It’s no secret that AI agents offer the potential to improve employee productivity considerably. However, that productivity also introduces newer and increased cybersecurity risks. And for investors willing to make an educated bet on which software companies will survive the “SAAS-pocalypse”, this could be the moment to strike while the iron is hot.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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