The last 15 years have been mostly great for companies that develop cloud-based enterprise software solutions. Software companies generally benefited by transitioning from a perpetual license sales model to a subscription model. They were also able to simplify their software development because their programs would be running on remote servers rather than on local machines with a wide range of hardware and operating systems to support.
The market rewarded the improving results of many of these businesses, but not everyone was sold on the lofty valuations of software-as-a-service (SaaS) stocks.
The value investors at Harris | Oakmark felt the market was overvaluing many stocks in the sector, particularly because it was paying too little heed to the impact of stock-based compensation, which is prevalent at SaaS companies. The market also has a tendency to expect SaaS companies' revenue growth rates to be linear, ignoring the potential impacts of normal competition, argued analyst Jeremy G. Thames.
But the market is starting to consider the possibility that new rivals will seriously eat into the sales of many established enterprise SaaS companies. The potential for generative artificial intelligence (AI) tools to replace existing solutions has driven down stock prices across the industry. In fact, prices have gotten so low that Harris | Oakmark now sees some buying opportunities.
Image source: Getty Images.
Two big reasons the market is overreacting
The massive sell-off in software stocks over the last few months was due to the perceived threat of generative AI. Tools like Claude Code from Anthropic are enabling people without any background in software engineering to create custom applications. Anthropic extended the Claude Code agent to general workplace productivity tasks with the introduction of Claude Cowork earlier this year, posing a direct threat to several established companies. Furthermore, some see LLMs' ability to facilitate natural language interactions with software as lowering the learning curve for software and reducing switching costs.
But Thames asserts that the fear that AI will completely disrupt the business models of many software companies doesn't reflect how the industry or large enterprises operate. He lays out two clear arguments as to why the AI threat could be overblown.
The first is that vibe-coded custom software is unlikely to replace established enterprise software suites offered by giants like Salesforce (CRM 2.74%) or SAP (SAP +1.37%). The reason businesses use those products isn't that they have unique features or better user interfaces.
"Executives choose established players because they are industry-standard products," Thames writes. That status brings with it a level of reliability, support services, a community of users to ask questions of and to help develop solutions, and a broad ecosystem of software and services that work with it.
In other words, you get more than just the software when you use Salesforce, SAP, or any other widely used program. That makes the switching costs high and provides intangible benefits unmatchable by new start-ups or custom vibe-coded solutions.
NYSE: CRM
Key Data Points
Second, Thames argues that the implementation of large language models in the workforce may ultimately benefit incumbent software providers.
"The utility of any AI tool is ultimately limited by the depth and quality of the data it can access and manipulate," he said. "We believe incumbent enterprise software companies have a distinct advantage here."
Indeed, Salesforce is building its Agentforce service on the back of its Data Cloud, which collects and stores enterprise data. Meanwhile, it has decades of user-generated data that it can draw from. That supports Thames' belief that "as AI becomes a critical component of the modern enterprise, it will rely heavily on the structured, trusted data and workflows that are encoded within these core systems." As a result, AI may actually make incumbent software solutions even more valuable for businesses.
How you can take advantage of the SaaS sell-off
Not every software company will be immune to the challenges posed by artificial intelligence, and not all will be able to take advantage of the opportunities the technology offers. But the indiscriminate sell-off in software stocks has created several great opportunities for investors.
The Harris | Oakmark memo calls out both Salesforce and SAP. Both companies are entrenched in their customers' operations, as they have long used the land-and-expand strategy to increase the value their customers provide to them over time.
SAP continues to transition to the cloud and posted current cloud backlog growth of 25% last year. However, that wasn't quite enough to stave off the fears that AI will displace its products. Management said the number would've been higher, but it was negatively impacted by long-term deals that have larger ramp-ups in their later years.
NYSE: SAP
Key Data Points
Salesforce is effectively using AI to increase the value of its entire ecosystem. Its Agentforce platform enables customers to create AI agents that effectively use its software. Agentforce sales increased 169% year over year last quarter to $800 million.
Other great opportunities in the software space include Microsoft (MSFT +0.69%) and ServiceNow (NOW 2.96%). Revenues from Microsoft's enterprise software segment, which includes its Microsoft 365 suite and Dynamics 365, are still growing at percentage rates in the high-teens. That growth has been propelled by the integration of its Copilot AI feature, which now has 15 million paid subscribers. With over 400 million total Microsoft 365 users, it still has a lot more room to grow.
NASDAQ: MSFT
Key Data Points
ServiceNow was quick to adopt generative AI features in its software suite. It's seeing strong momentum from Now Assist; its annual contract value reached $600 million at the end of 2025 and is on track to reach $1 billion by the end of 2026. The company is positioning its AI Control Tower platform as the center for any enterprise's agentic AI strategy, allowing them to integrate first- and third-party AI agents across its software.
After these stocks' declines of the last few months, they all present compelling buying opportunities. Their forward P/E ratios range from 15 (Salesforce) to 29 (ServiceNow) and accurately reflect each company's growth potential while accounting for the risks posed by AI. Importantly, all of these companies have shown the ability to adapt to AI and build moats around their businesses.
