The S&P North American Technology Software Index, which tracks 111 software stocks, has declined 30% from the record high it reached in September. That puts the index in bear market territory. And the root cause is artificial intelligence (AI).
Investors are concerned AI will upend the software industry. Tools like Cowork (developed by Anthropic) can automate work in sales, marketing, finance, and legal departments, which raises questions about the durability of current software products and business models.
However, Nvidia CEO Jensen Huang thinks the market has misread the situation. "There's a whole bunch of software companies whose stock prices are under pressure because somehow AI is going to replace them," he said at a recent event. "It is the most illogical thing in the world."
That does not mean software stocks will rebound in the near future, but it does cast the current situation as an opportunity for patient investors. Here's why Shopify (SHOP 2.29%) and AppLovin (APP 1.39%) are worth buying.
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Shopify: 55% upside implied by Wall Street's median target price
Shopify develops e-commerce software that serves as a centralized dashboard from which merchants can manage sales across physical and digital stores, including social media, online marketplaces, and custom websites. The company supplements its core software with adjacent solutions for marketing, payments, and logistics.
Consultancy Gartner recently ranked Shopify as a leader in digital commerce, listing rapid innovation, enterprise-grade reliability, and support for businesses of all sizes as important strengths. Indeed, while Shopify first became popular with small businesses, the company has turned its attention to enterprise customers by adding more sophisticated features, such as support for business-to-business commerce.
Shopify is leaning into the artificial intelligence era in a few ways. It helped Alphabet's Google develop the Universal Commerce Protocol, an open standard that lets merchants integrate product catalogs into AI tools like Gemini and ChatGPT. Since January 2025, orders from AI search have jumped 15x. Shopify has also added AI tools for store building, marketing, and back-office management.
Shopify currently trades at 75 times adjusted earnings, which is expensive for a company whose earnings are forecast to increase 30% in 2026. However, I think operating expenses as a percentage of revenue will drop meaningfully in the future, especially as the company realizes benefits from AI developer tools.
For that reason, I think investors should focus on the price-to-sales ratio right now. Shopify currently trades at 10 times sales, a discount to the three-year average of 14 times sales and a very reasonable price for a company whose sales are forecast to increase 26% in 2026.
Indeed, analysts' median target price is $162.50 per share, according to The Wall Street Journal. That implies a 55% upside from the current share price of $105.
NASDAQ: SHOP
Key Data Points
AppLovin: 92% upside implied by Wall Street's median target
AppLovin develops adtech software. The company initially focused on the mobile gaming industry, where it helped developers market and monetize applications. But the company recently expanded into web-based advertising with its new self-service platform, which will eventually automate every workflow from campaign creation to optimization.
AppLovin has distinguished itself with Axon, which is a "best-in-class machine learning ad engine," according to Morgan Stanley. Axon excels at targeting campaigns because AppLovin also owns a mediation platform called Max, which lets publishers sell inventory across multiple ad networks. High-quality data gathered from Max (i.e., which ads resonate best with certain audiences) is then used to train Axon's AI models.
Indeed, AppLovin delivers a 45% higher return on ad spending than Meta Platforms and a 115% higher return on ad spending compared to secondary platforms like TikTok, Pinterest, Snap's Snapchat, and Alphabet's YouTube, per marketing attribution company Northbeam. For that reason, Mark Giarelli at Morningstar says Axon affords AppLovin a durable competitive advantage.
AppLovin currently trades at 38 times earnings, a very reasonable (if not cheap) valuation for a company whose earnings are projected to increase 50% in 2026. Indeed, analysts' median target price is $710 per share, according to The Wall Street Journal. That implies 92% upside from the current share price of $370.
