Adobe tops the list for software companies in the S&P 500 by expected free cash flow yield (after dividends), while Oracle, Microsoft, CrowdStrike and Palantir take the bottom rankings
Adobe has an estimated free cash flow yield of 10.57%, compared with an expected FCF yield of only 0.38% for Microsoft, based on consensus 12-month estimates among analysts polled by FactSet.
The software industry has been on a wild ride this year, but investors might be best served by looking harder at how much cash a company is generating, which is crucial as the largest players continue to spend heavily on the build-out of artificial-intelligence infrastructure.
Strategists at Morgan Stanley, led by Mike Wilson, wrote in a note to clients about a changing focus within the stock market from an "early-cycle, capital intensive trade" on AI development toward a "midcycle rotation toward quality, strong free cash flow, AI adopters and asset-light/ services businesses."
That boils down to mature businesses that don't require major capital investment, with the software industry among those listed by the analysts. In the first half of 2026, the S&P 500 software industry group declined 19.6% on fears that the AI trade would make some of its offerings superfluous.
Meanwhile, the full S&P 500 SPX returned 10.2% during the first half of the year, with dividends reinvested. Since June 30, the software group has roared back with a 23.4% return, as the S&P 500 has returned 3.2%.
But many software stocks are still down significantly this year. And when the Morgan Stanley strategists pointed to "strong free cash flow," they excluded the two largest names in the group - at least for now.
A company's free cash flow is its remaining cash flow after expected capital expenditures. This is money that can be deployed through additional investments, acquisitions, dividend increases or share buybacks. Stock repurchases can lower a company's share count, which raises its earnings per share and can support a rising share price.
A company's forward free-cash-flow yield is the consensus 12-month estimate for its free cash flow per share divided by its share price. A combination of a high FCF yield and an attractive valuation relative to earnings might make for a good focus for investors who agree with the Morgan Stanley strategists' market view.
Microsoft (MSFT) is expected by analysts polled by FactSet to generate free cash flow per share of $5.56 over the next 12 months. This makes for a forward FCF yield of only 1.11%, based on the stock's closing price of $499.70 on Friday.
The second-largest software company in the S&P 500 by market capitalization is Oracle (ORCL), and the company's estimated 12-month FCF per share is -$18.43.
So we screened all 26 companies in the S&P 500 software industry group for FCF yield, taking the idea a bit further by considering current dividend payouts. If we subtract the dividend yield from the forward FCF yield, we can compare companies' expected FCF "headroom."
Here are all 26 software companies in the S&P 500 ranked by expected FCF headroom over the next 12 months, based on data and consensus estimates provided by FactSet:
Company Forward FCF "headroom" Estimated FCF yield for next 12 months Dividend Yield Forward P/E Forward P/E at the end of 2025 Adobe 10.57% 10.57% 0.00% 9.6 14.8 Leidos Holdings 8.71% 10.01% 1.29% 10.4 14.7 Fidelity National Information Services 8.34% 12.54% 4.20% 6.2 10.5 Gen Digital 7.77% 9.41% 1.63% 9.7 9.8 Intuit 6.99% 8.65% 1.66% 13.0 27.0 Trimble 6.84% 6.84% 0.00% 14.5 22.7 Salesforce 6.78% 7.46% 0.68% 15.2 20.3 Autodesk 6.45% 6.45% 0.00% 15.6 25.8 PTC 6.40% 6.40% 0.00% 15.3 21.7 Trade Desk 6.21% 6.21% 0.00% 49.7 34.5 Roper Technologies 5.97% 6.87% 0.89% 16.7 20.6 AppLovin 5.71% 5.71% 0.00% 16.6 45.8 F5 5.20% 5.20% 0.00% 21.7 16.6 ServiceNow 4.38% 4.38% 0.00% 28.3 37.4 Veeva Systems 3.79% 3.79% 0.00% 27.0 26.2 Synopsys 3.64% 3.64% 0.00% 23.4 31.7 Jack Henry & Associates 3.26% 4.74% 1.47% 21.6 27.1 Cadence Design Systems 2.74% 2.74% 0.00% 32.3 38.9 Automatic Data Processing 2.74% 5.19% 2.45% 21.7 22.5 Take-Two Interactive Software 2.02% 2.02% 0.00% 25.3 38.0 Palo Alto Networks 1.94% 1.94% 0.00% 77.8 45.3 Datadog 1.77% 1.77% 0.00% 73.3 58.1 Palantir Technologies 1.37% 1.37% 0.00% 83.9 179.6 CrowdStrike Holdings 0.98% 0.98% 0.00% 143.7 99.5 Microsoft 0.38% 1.11% 0.73% 24.1 27.7 Oracle N/A -11.61% 1.26% 18.9 25.3
Adobe (ADBE) tops the list with the highest expected FCF yield and FCF headroom. As you can see from the table, the stock's forward P/E ratios have declined significantly this year. While the stock was down 24% for 2026 through Friday, the rolling consensus 12-month earnings-per-share estimate for the company rose 13%.
Adobe's forward P/E of 9.6 compares with weighted valuations of 25.2 for the S&P 500 software group and 19.6 for the full S&P 500, according to FactSet. The nine companies ranked at the top of the list all have forward P/E well below that of the S&P 500.
Joining Oracle and Microsoft at the bottom of the FCF yield list are CrowdStrike (CRWD) and Palantir (PLTR), with low expected FCF yields. And these two companies' forward P/E ratios are also very high.
Click on the tickers for more about each company.
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-Philip van Doorn
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