As (by far) the largest sector in the Nasdaq Composite (^IXIC -0.34%), technology has been instrumental in driving the index to new heights. Megacap "Ten Titans" stocks like Nvidia and Microsoft make up a massive share of the tech sector and have continued seeing outsize year-to-date gains.
Dig deeper, and you'll find that many large software companies have undergone sizable sell-offs.
Salesforce (CRM -0.26%) and Adobe (ADBE -0.04%) are down more than 20% year to date despite a 12% gain in the Nasdaq. Here's what's driving the sell-off in these artificial intelligence (AI) growth stocks, and if they could be worth buying now.
Image source: Getty Images.
AI is challenging the SaaS business model
At its core, what makes AI so exciting is its ability to improve efficiency by allowing companies and individuals to do more with fewer resources. AI can expedite research, provide helpful tips for coding, and accelerate task completion across industries. Large language models (LLMs) created by companies like OpenAI, Microsoft, Alphabet, and Meta Platforms provide a new technological foundation for enterprise software companies.
Salesforce and Adobe became tech giants by carving out a niche in enterprise workflows and selling software as a service (SaaS) -- a model that depends on a growing number of users. Salesforce did it with customer relationship management (CRM) software for sales, services, marketing, analytics, and more. Adobe built its SaaS empire around Creative Cloud -- a portfolio of apps for videos, photos, graphic design, audio, and publishing.
Users doing more with less means enterprises may be able to reduce the number of software subscriptions -- posing a challenge to the SaaS model. And worse yet, if rival companies can replicate some of the tools that Salesforce and Adobe provided, then it could lead some clients to go with a competitor or cancel their subscriptions.
AI is an opportunity for SaaS companies, but it also levels the playing field and erodes the moats of established players. A legacy software giant like Adobe is now more vulnerable than ever to disruption by newer, smaller companies like Canva and Figma, which have their own growing list of AI offerings.
Salesforce could lose market share to Microsoft Dynamics 365, which integrates with the Office 365 software suite and provides CRM and enterprise resource planning services.
Similarly, Oracle's Cloud CX platform competes with Salesforce clouds. Oracle's combination of cloud and database software, along with its CX Platform, gives it a more complete offering than Salesforce.
The market isn't rewarding Salesforce and Adobe for their AI upgrades
So far, many of the beneficiaries of AI investor excitement have been the companies providing the hardware and equipment -- like Nvidia and Broadcom -- and the infrastructure companies that are building software, frameworks, databases, storage, networking, etc. In a figurative sense, these companies are constructing a nationwide highway network to cut commute times and boost commerce.
But you still need cars to drive on the highway, or else it is rendered useless. The advantage of companies like Microsoft and Oracle is that they are building the highway and selling cars. SaaS companies, by contrast, are like automakers going toe to toe in the highly competitive passenger vehicle market.
Still, the application software companies have an incredible opportunity to leverage AI into their existing solutions -- especially through agentic AI, where AI agents help accomplish tasks for the user. These agents act as sophisticated assistants that can speed up workflows.
Despite what their falling stock prices may suggest, Salesforce and Adobe aren't asleep at the wheel when it comes to AI.
Salesforce has a predictive, generative, and agentic AI tools under its Agentforce lineup. Einstein offers a complete suite of AI tools, with a version starting at $25 per month per user and going up to $500 per user per month, not including add-ons.
Adobe has a number of AI assistants, generative AI tools, and agentic AI that help users build, edit, and interact with media. For example, Adobe's AI assistants for Acrobat allow users to interact with documents to generate summaries, reports, emails, texts, and social posts. Adobe Firefly is a text-to-image generator. And Sensei can perform tasks like reframing video footage, filling images for consistency, and predicting trends for marketing content.
Salesforce and Adobe are innovating at an incredible pace -- it's just that their competitors are, too. As a result, Salesforce and Adobe have delivered lackluster growth, showcasing how AI developments haven't directly translated to their earnings.
In its latest quarter -- the first quarter of fiscal 2026 ended April 30 -- Salesforce issued full-year fiscal 2026 revenue guidance of just 8% to 9%, operating cash-flow growth of 10% to 11%, and an operating margin of 34%.
The midpoint of Adobe's updated full-year fiscal 2025 guidance (period ending Nov. 28) calls for just 9.5% year-over-year revenue growth and 11.8% non-GAAP (adjusted) earnings-per-share (EPS) growth.
Overall, their results aren't terrible -- but they are fairly unimpressive compared to the breakneck growth rates of companies that have done a better job converting AI spending into bottom-line results.
Salesforce and Adobe have fallen far enough
Salesforce and Adobe aren't the only application software stocks that are beaten down. Monday.com fell nearly 30% last week. Palo Alto Networks, Autodesk, Datadog, Workday, ServiceNow, and Atlassian are just some of the many application software companies that are down year to date.
When earnings are going up and a stock's price is going down, the valuation becomes more enticing. Sure enough, Salesforce sports a forward price-to-earnings (P/E) ratio of just 21.5, and Adobe has a 17.3 forward P/E. Those are both lower than the S&P 500 (^GSPC -0.47%) forward P/E of 23.3.
Salesforce and Adobe have their challenges, but these are still great companies. So the fact that they are cheaper than the S&P 500 on a forward earnings basis is a good indicator that the sell-off has gone too far.
Still, buying either stock requires the conviction that the company can continue innovating and succeeding despite the onslaught of new competition. Investors approaching the application software industry should understand that valuations are low for good reasons.
