AI-native startups are posing a greater threat to software firms.
Hardware and semiconductor stocks have increased as a result of the artificial intelligence trade, but other tech sectors have not benefited as much.
On a price-to-earnings ratio, certain software and IT equities are actually trading close to their lowest multiples in recent memory. As investors look for more alluring prospects in AI infrastructure, money has been moving out of such ventures.
The dynamic is the subject of intense discussion on Wall Street. While some see a chance to purchase high-quality stocks at discounted rates, others contend that many of the bets may suddenly be inexpensive for good reason since AI might seriously harm their business models.
Rob Oliver, a senior research analyst at Baird, told MarketWatch, “The pace of AI revenues, which are still very small, is frustrating.” Meanwhile, established software companies face increased competition from AI-native startups.
Major technology stocks that were within 10% of their five-year forward P/E lows were examined by BourseWatch. Ten stocks, including well-known brands like Adobe (ADBE), Salesforce (CRM), and ServiceNow (NOW), that are either in the Nasdaq-100 Index NDX, the S&P 500 index’s SPX information-technology sector, or the “Magnificent Seven,” met the criteria.
Company Forward Five-year Year-to-date
Roper Technologies 20.6 20.5 -15%
Workday 20.5 20.4 -15%
Tyler Technologies 36.0 35.7 -20%
GoDaddy 17.6 17.4 -36%
ServiceNow 38.3 37.7 -27%
Fortinet 28.2 26.9 -15%
CDW 13.9 13.1 -19%
Intuit 27.2 25.2 7%
Salesforce 19.6 18.1 -23%
Gartner 18.3 16.6 -48%
Source: FactSet
Due to its recent split from DuPont de Nemours (DD) and absence of a comparable five-year trading history, Qnity Electronics (Q), which also satisfied the requirements, was not included.
Despite promoting its own AI tool, Firefly, Adobe has been particularly hard hit this year because to concerns that AI-native rivals like Figma (FIG) and Canva are stealing its ideas.
“Adobe faces far more competition today than it did a few years ago,” Oliver, who rates the stock as neutral, stated. “A portion of Adobe’s fall can be attributed to the heightened competition. The fact that the growth rate has suddenly slowed and people are wondering if it will be a double-digit grower is partly to blame.
Earlier this week, KeyBanc analyst Jackson Ader downgraded the shares of Adobe and ServiceNow from sector-weight to underweight, stating in a report that both firms are anticipated to face slowing sales growth. Ader stated following Adobe’s results announcement last week that he thinks the stock won’t bounce back in 2026 because of growing competition from both AI-native apps and big language model makers. “The diversity of players developing AI capabilities that, at their heart, are creation machines makes Adobe’s position in the marketplace a difficult one,” Ader stated.
With his cautious perspective, Ader joins a number of prominent analysts: In August, Ben Reitzes of Melius Research lowered Adobe’s shares from hold to sell. Dan Ives, a Wedbush analyst, stated earlier this month that Adobe’s core professional user base is expected to decline as a result of AI disruption. Despite giving Adobe’s stock an outperform rating, Bernstein analyst Mark Moerdler stated in a note last week that there isn’t enough information for the business to “disprove the bear thesis” just yet.
Many observers consider ServiceNow to be an AI success story in the software sector. It was among the first software firms to effectively switch from per-user to usage-based pricing and raise prices for its AI-enabled “Pro Plus” tier.
Nonetheless, Ader stated that he believes there is a growing chance that in the upcoming quarters, ServiceNow’s operations will be increasingly vulnerable to AI danger. Due in part to a recent Bloomberg report indicating that the company is in talks to acquire cybersecurity firm Armis, ServiceNow’s shares dropped about 12% on Monday. Investors worry that an acquisition may take focus away from AI initiatives.
ServiceNow was dubbed “the cheapest large-cap software stock” during the selloff by Bernstein analyst Peter Weed, who resisted the pessimistic atmosphere around the company. According to Weed, acquiring Armis would be a strategic fit with ServiceNow’s architecture and might result in higher revenue.
This year, Salesforce has encountered doubts about its capacity to make money from its Agentforce platform, which enables users to create and implement AI agents. However, the company’s December earnings call indicated that more AI tokens were being processed and that customers were paying for AI solutions. Additionally, the business has raised the prices of its goods, which some analysts view as a positive indication that Salesforce’s AI solutions are benefiting users.
“Salesforce is a very inexpensive stock, and our checks have continued to support that there’s interest in Agentforce,” Oliver stated. Salesforce and ServiceNow shares have given him outperform ratings.
This year, slower growth in contract prices has had a significant impact on the shares of IT research firm Gartner outside of traditional software. Andrew Nicholas of William Blair stated that he thinks the impact of AI on the IT research firm has been exaggerated and assigns the stock an outperform rating, despite the fact that Gartner’s stock is currently the fifth-worst performer in the S&P 500 this year.
Nicholas stated in a letter from November that customers have used Gartner to assist with their own AI plans, and the company has been implementing AI tools internally to increase efficiency.
