Most software companies are expected to show a slowing pace of sales growth over the next two years. Oracle and DigitalOcean are among the exceptions.
As investors bail on chip stocks, they are taking a fresh look at software stocks, which have been weighed down by artificial-intelligence concerns.
Among software stocks, Workday (WDAY), Autodesk $(ADSK)$, Palantir Technologies (PLTR) and ServiceNow (NOW) were among the biggest S&P 500 SPX gainers on Monday, logging price increases in the neighborhood of 7% or greater. They helped power the iShares Expanded Tech-Software Sector exchange-traded fund IGV to a 3.3% gain on a day when the VanEck Semiconductor ETF SMH declined 2.3%.
The rotation continued into Tuesday's session, with Accenture $(ACN)$ and Workday among the S&P 500's top performers as the chip-sector selloff intensified and investors looked for new places to park funds. The iShares Expanded-Tech Software Sector ETF was up another 1.3% in midday trading.
The top 25 semiconductor and hardware companies account for about $22 trillion in combined market capitalization, Evercore ISI analyst Kirk Materne said in a note to clients on Tuesday, "so even a very small amount of capital flowing from semis to software can move the needle."
Still, it is worth putting the software sector's recent momentum into perspective. The S&P 500's software industry group is down 18% so far this year, reflecting concerns about disruption risk brought about by artificial intelligence. Furthermore, IBM $(IBM)$ recently highlighted that customers had less budget room for general software offerings because they have had to allocate more money toward hardware and cybersecurity.
Another reason for this year's harsh software-sector declines could be the expectation of slowing sales growth for many companies. For example, Salesforce's (CRM) revenue increased at a compound annual growth rate of 9.9% from calendar 2022 through 2025, according to FactSet. Based on consensus estimates, the company is expected to increase sales at a lower CAGR of 6.3% from 2026 through 2028.
While investors are wading back into software stocks, many analysts recommend a selective approach, since the threat of AI still clouds the sector.
To that end, MarketWatch sought to identify companies that are projected to show higher sales CAGRs through 2028 than they did in the period from 2022 to 2025.
Among the 24 software companies in the S&P 500 SPX for which FactSet has consensus revenue estimates through 2028, all but three are expected to see slower paces of sales growth from 2026 through 2028 than they did from 2022 through 2025. Here are the three exceptions, sorted by market capitalization and adjusted for reporting periods that don't match the traditional calendar cycle:
Company Sales CAGR from 2022 through 2025 Projected sales CAGR from 2026 through 2028 Forward P/E 2026 price change through July 27 Market cap ($bil)
Oracle 9.9% 25.7% 14.1 -38% $345
Electronic Arts 0.4% 2.3% 23.1 2% $52
Trimble -0.8% 6.1% 14.4 -29% $13
Source: FactSet
As you can see, the exceptions haven't exactly seen standout stock performance either. Oracle's stock $(ORCL)$, for instance, has come under pressure due to concerns about the company's heavy spending on AI data centers.
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A wider software industry stock screen
With so few software stocks in the S&P 500 expected to show accelerating sales growth rates over the next two years, we ran the same comparison for the 79 software stocks in the S&P Composite 1500 Index XX:SP1500, which is made up of the S&P 500, the S&P MidCap 400 Index MID and the S&P Small Cap 600 Index SML.
We cut the expanded list to 64 software companies for which consensus sales estimates are available through calendar 2028 among at least five analysts polled by FactSet. Of those companies, only six are projected to see sales grow more quickly from 2026 through 2028 than they did from 2022 through 2025.
Here they are, this time sorted by projected sales CAGR:
Company Sales CAGR from 2022 through 2025 Projected sales CAGR from 2026 through 2028 Forward P/E 2026 price change through July 27 Market cap ($bil) DigitalOcean 16.1% 28.7% 78.4 150% $14.1 Oracle 9.9% 25.7% 14.1 -38% $345.4 Trimble -0.8% 6.1% 14.4 -29% $13.0 Corsair Gaming 2.3% 4.8% 14.1 77% $1.1 Electronic Arts 0.4% 2.3% 23.1 2% $52.4 Teradata -2.5% 1.4% 10.7 -2% $2.8 Source: FactSet
Based on these figures and the forward price-to-earnings ratios, investors might be staring at a bargain with Oracle. That stock's forward P/E declined to 14.1 as of Monday's close, down from 25.3 at the end of last year and from this year's peak forward P/E of 30.9 on June 1.
Emily Bary contributed.
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