By Jacob Sonenshine
The stock market, enduring an intense period of AI disruption, is sorting through which software companies are going to come out winners -- and which appear headed the other way.
When the iShares Expanded Tech-Software Sector Exchange-Traded Fund dropped 35% from its record high to its February low, the vast majority of stocks were down from peaks. Some days, almost all of the 114 stocks in the ETF dropped.
Their valuations took hits because Anthropic and OpenAI improved their cutting-edge artificial intelligence tools, and customers have been rushing to adopt them. That's threatening to take substantial market share from the many business applications and other products public software companies sell.
Software shares have begun to recover, with the fund up 9% from its low. The first day of recovery in late February saw almost all stocks -- 98 of them -- bounce. Investors took advantage of the cheaper-looking industry across the board.
Friday morning, the fund was in the green, but only 78 of its stocks were up. It gave up the gains later, along with the broader market on geopolitical issues. In the past month, the ETF has gained a touch, but only 59 stocks are up. While some stocks are giving back their gains from the late February bounce, others look healthier and ready for acceptable growth.
Microsoft's stock was narrowly in the green Friday morning, as the market can envision robust long-term growth. Its intelligence cloud business represented nearly a fifth of its $304.8 billion in 2025 total sales, and encapsulates the data storage and computing product it provides to OpenAI and Anthropic.
Those customers are the very disruptors threatening other software companies but they need Microsoft, which analysts expect will grow intelligent cloud by 25% annually over the next two years, according to FactSet.
Whether the rest of Microsoft's business takes a hit from coding tools from the likes of ChatGPT remains to be seen. But earnings estimates have only risen this year, and even if profit margins don't rise much -- given Microsoft's aggressive investments in its new projects -- bottom line dollars can still grow 21% annually over the next five years.
A catalyst for the market to more confidently believe in that growth trajectory would be strong earnings reports over the next several quarters, especially if management doesn't increase its forecast for capital investments.
Strong earnings reports already have boosted Oracle. The stock rose 9.2% Wednesday after its quarterly report showed better-than-expected sales across segments, which include revenue for compute power sold to OpenAI.
The resulting earnings growth can go a long way in quelling the market's concerns about its massive investments and borrowings, especially because the company didn't raise its capital expenditure and borrowing forecasts, and said it hasn't needed to raise equity financing.
This stock, too, remains well below its peak.
Adobe, meanwhile, saw its stock fall just over 6% Friday morning, even after beating sales and earnings estimates on its fiscal first quarter report Thursday evening.
Although the year over year sales growth rose to 11% from 10% in the fourth quarter, the $6.46 billion sales guidance for the current quarter was only in-line with what analysts had forecast. Meanwhile, the company's commentary about net new annual recurring revenue disappointed investors, Jefferies trading analyst Jeff Favuzza writes. Also, longtime CEO Shantanu Narayen is stepping down -- without a successor announcement.
Adobe faces pressure to prove it can compete against AI for the long term. Tools from private companies Canva and OpenAi's Sora have gained traction, and the market is no longer willing to pay a premium valuation to own Adobe.
"As always, management changes when there is no immediate successor always come with greater skepticism," Favuzza writes.
Elsewhere, ServiceTitan stock was down just over 6% Friday after earnings. The company provides customer relationship management software to small, housing-related service businesses. It beat fiscal fourth quarter sales and earnings, but sales only beat by $9 million, versus $11 million in the prior earnings report. This disappointed a market that had bid the stock up from its February low.
The $254 million sales result was "below the expectations we heard [from investors] heading into the print looking for something closer to $257 million," writes Favuzza.
Bulls can argue to buy what has been a harsher dip for Adobe and ServiceTitan, but at this point consider taking your chances on the two software behemoths. They look better positioned to win.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 13, 2026 16:07 ET (20:07 GMT)
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