For investors unafraid of a contrarian trade, there could be some opportunities for big gains in the software sector.
Software stocks have been mercilessly battered in recent weeks, and that trend has continued in a striking way to start this year. On Jan. 2, the VanEck Semiconductor ETF SMH outperformed the iShares Expanded Tech-Software Sector ETF IGV by 6.6 percentage points - the second-largest daily divergence on record, according to Dow Jones Market Data.
This week, the launch of Anthropic's Claude Cowork tool provided a fresh catalyst triggering further stock declines. Now, the software ETF is off 7.0% on a year-to-date basis and down 10.5% over the last six months.
The recent price action is the latest manifestation of investor concerns that artificial-intelligence tools will displace existing software solutions. However, the continued selloff is baffling some analysts on Wall Street, who see the disparity as unfounded. With that mindset, software stocks backed by solid businesses - including Microsoft $(MSFT)$, Salesforce (CRM), Snowflake (SNOW), Datadog (DDOG) and Intuit $(INTU)$ - could be great bargains.
Shares of Salesforce and Snowflake were hit especially hard on the Claude Cowork news, falling 7% and 5%, respectively, on Monday. Mizuho trading-desk analyst Jordan Klein characterized the dramatic price action as "silly" in a Wednesday note. In his view, investors are stubbornly clinging to the AI bear thesis and looking for any reason to sell their software positions.
Not even Microsoft, the industry's "Magnificent Seven" stalwart, has been spared from the selloff, and Klein suggests the upside opportunity there outweighs the potential risks.
Many analysts believe that it won't be so easy for AI agents to replace traditional software, especially when it comes to complicated business workflows that handle sensitive data.
"The enterprise is really complicated," Patrick Walravens, head of technology equity research at Citizens, told MarketWatch. "It doesn't go that fast. People have vendors who they've worked with for years, and they want to keep working with those vendors."
Buying the dip
D.A. Davidson analyst Gil Luria sees a good opportunity to add to software positions, but with a selective approach. He points to names such as Microsoft, Snowflake and Datadog, as he believes 2026 will be an opportunity for them grow revenues and disprove AI fears.
"Nothing about the software business model has actually changed," Luria wrote in a Wednesday note, pointing out that companies in the sector are still high-margin and scalable businesses. Instead, the narrative that AI will eliminate software has "replaced revenue growth as the key valuation driver," he added. Wall Street expects both Datadog and Snowflake to grow revenues over 20% in the next year.
Additionally, many of these software names are pivoting to monetize the AI boom themselves. In a November note, Luria wrote that Datadog, an infrastructure-monitoring services provider, had announced a nine-figure annualized expansion deal with its biggest AI-native customer, which many interpreted to be OpenAI.
In late 2024, Salesforce launched its Agentforce AI platform, which Walravens said achieved $540 million in annual recurring revenue last quarter, a 330% year-over-year increase.
Snowflake plays a critical role in the emerging ecosystem of AI agents, Walravens added. "An agent that doesn't have good data is useless," he noted. Demand for Snowflake's AI services is increasing rapidly; in December, the company achieved a $100 million AI-revenue run rate a quarter earlier than expected.
Intuit's stock tumbled this week as some wondered if AI agents could autonomously file taxes. Shares are now almost historically cheap on a forward price-to-earnings basis despite fundamentals remaining intact, Mizuho analyst Siti Panigrahi wrote in a Wednesday note, "offering an attractive entry point."
Panigrahi expects Intuit to deliver over 10% of TurboTax revenue growth in fiscal 2026, beating guidance of 7.5% to 8.0%. "Intuit's integrated data, compliance expertise and end-to-end workflow remain difficult to replicate with general-purpose AI tools," Panigrahi wrote.
As software companies begin reporting earnings in late January and early February, more data on AI adoption could help turn the narrative around. But until then, Klein believes there could be room for further losses.
While more information on these companies' AI strategies could spark a narrative shift, Klein cautions that the sector may see more volatility to come, as it's unclear what it will take to dispel AI fears. As such, successful software investors will need patience and the conviction to ride out the storm.
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