Software stocks are currently trading at historically low valuations, presenting a compelling investment opportunity. This is particularly intriguing given the significant role of artificial intelligence (AI) in the current bull market. While AI has the potential to enhance productivity and profitability across various industries, it also poses challenges for certain sectors, notably the software industry. The recent sell-off in software stocks has pushed their forward price-to-earnings (P/E) ratio to a historic low, making them an attractive bargain for investors.
The software sector has experienced a downturn due to concerns about the potential disruption of enterprise software by generative AI. This has led to reduced investor confidence in the earnings potential of software companies, particularly those relying on software-as-a-service (SaaS) subscriptions. As a result, investors are willing to pay lower multiples for future earnings, causing software stocks to trade at significantly lower valuations compared to the overall market.
Historically, software stocks have traded at higher P/E multiples than the S&P 500, reflecting their fast-growing nature and the predictability of SaaS revenue. However, the current market conditions have pushed software stocks to their lowest valuation ever relative to the S&P 500. This presents an opportunity for investors to capitalize on the sector's undervaluation.
Two software stocks that stand out as potential bargains are Salesforce and ServiceNow. Salesforce, despite a recent slowdown in revenue growth, is expected to reverse this trend in the near future. The company's AI products, particularly the Agentforce platform, are gaining traction, with revenue climbing 169% year over year. The addition of Data 360 and the newly acquired Informatica further bolsters AI-related revenue, contributing to a 200% increase in total AI-related revenue to $2.9 billion.
Salesforce's outlook for 2027 and beyond is promising, with revenue forecasts reaching $46 billion at the midpoint of guidance, up 11%. The company's commitment to efficiency and scaling up AI operations is expected to improve its operating margin. Additionally, Salesforce's recent accelerated share repurchase program of $25 billion demonstrates its confidence in the company's long-term prospects.
ServiceNow, another AI-driven software company, is also experiencing strong growth. Its AI solutions reached $600 million in annual contract value as of the end of 2025, surpassing its goal of $500 million. The company's AI Control Tower platform is gaining momentum, with deal volume tripling sequentially in the last quarter. ServiceNow's focus on integrating acquisitions and organic growth is expected to result in around 20% revenue growth on a constant-currency basis in 2026, with an expansion in operating margin to 32%.
Despite the sector's challenges, ServiceNow continues to demonstrate strong net revenue retention among its customers, ensuring substantial long-term growth. The company's expanding suite of services positions it as a central player in agentic AI strategies for businesses. As ServiceNow continues to attract new customers and maintain high net revenue retention, it is well-positioned for sustainable long-term revenue growth.
In conclusion, the current low valuations of software stocks present a unique investment opportunity. While AI uncertainty has impacted the sector, companies like Salesforce and ServiceNow are leveraging AI to drive growth and improve efficiency. The undervaluation of software stocks, relative to slow-growing sectors, makes them attractive bargains with significant upside potential. Investors who recognize the long-term value of these companies may find themselves in a favorable position as the market recovers and software stocks regain their historical premium.
