Software stocks have been tumbling this year, and the reason is clear. Investors are suddenly afraid that AI will disrupt software, and there are signs that tools like Anthropic's Claude Cowork is already threatening to do so. Software stocks related to legal work, for example, plunged on Tuesday after the AI start-up released a new productivity tool for in-house lawyers.
This theory was summed up by John Zito of the private equity giant Apollo Global Management, who told an audience last fall that the real risk of AI was, "Is software dead?"
This year, the AI disruption theory has clearly gained steam with the iShares Expanded Tech-Software ETF (IGV 0.60%), which tracks most of the major software stocks, down 21% year-to-date, with a majority of those losses coming in the last week.
However, Nvidia CEO Jensen Huang pushed back on that notion in an interview on Tuesday at the Cisco AI Summit, saying, "This notion that the software industry is in decline and being replaced by AI (is) the most illogical thing in the world and time will prove itself." As he sees it, AI will use existing tools rather than reinventing them, so he expects AI to run with the help of existing software platforms.
As the leader of the company driving the AI boom, Huang may have his finger on the pulse of AI more than anyone else.
Taking a cue from him, let's look at three software stocks that look like smart buys after the recent sell-off.
Image source: Getty Images.
1. Microsoft
Microsoft (MSFT 0.35%) has dominated enterprise software for more than a generation, and is much more than a software company. Its Azure cloud infrastructure business is growing rapidly, with revenue up 39% in the most recent quarter, and it has a wide range of other businesses, including Windows, gaming, LinkedIn, and GitHub.
However, Microsoft's diversity and financial strength haven't made it immune to the software sell-off. Microsoft stock is now down 25% from its peak just three months ago, as the stock fell double-digits on its recent earnings report amid investor concern about the company's surge in capital expenditures to fuel its AI-focused cloud business.
NASDAQ: MSFT
Key Data Points
While Microsoft's free cash flow may be falling as it goes through an investment cycle, it's still growing rapidly, and the stock now trades at a price-to-earnings discount to the S&P 500. The company has multiple ways to grow, and it's both exposed to software and the companies supposedly disrupting software like OpenAI and Anthropic. Down 25%, now looks like a great buying opportunity for the tech giant.
2. Shopify
Shopify (SHOP 2.48%) has been one of the most successful SaaS stocks on the market over the last decade, but it's now down 38% from its peak at the end of October.
Shopify dominates its subsector of e-commerce software, and it's much larger than any direct competitor at this point. The company's tools allow anyone from a mom-and-pop entrepreneur to a Fortune 500 company to establish a presence online, facilitating web design, marketing, fulfillment, and payments. For AI to disrupt all those capabilities seems difficult, and Shopify has been incorporating AI into its platform through Shopify Magic, which helps automate content creation, personalize customer experiences, improve photos, and provide instant chat answers for customer service.
NASDAQ: SHOP
Key Data Points
If Shopify continues to execute, the stock should bounce back from the recent pullback.
The company has been growing quickly with revenue up 32% to $2.8 billion in its most recent quarter, and its strong performance looks poised to continue. Shopify is still expensive, trading around 100 times trailing free cash flow after backing out stock-based compensation.
3. Figma
Few stocks have fallen as far as Figma (FIG 5.28%) in recent months. The recent IPO skyrocketed after its debut in late July, but is now down about 85% from its peak and a third from its IPO price of $33.
Figma has emerged as a leader in design software, challenging Adobe, which had previously tried to acquire it for $20 billion. It's growing rapidly and has a history of generally accepted accounting principles (GAAP) profitability.
NYSE: FIG
Key Data Points
Design software may seem like a good target for AI, but Figma has also been rapidly incorporating AI into its product suite through both acquisitions and organic product development.
Finally, Figma skills are a common request on job openings on LinkedIn and other platforms, showing the product is in demand for both design and an asset for career advancement, which gives it a competitive advantage.
Like Shopify, the stock isn't exactly cheap after the sell-off, trading at a price-to-sales of roughly 10, but if it can maintain a growth rate of around 30% and deliver profits, better things should be in store for Figma.
