Bears Are WRONG About The Software Stock Sell-Off! Here's The REAL Data

0:00Software stocks have been falling off a cliff. Investors are freaking out and everyone wants to know, is this the end? Are software stocks never going to recover? Well, I don't think that's true. And I've got the data to prove it. Now, the word Saspocalypse has gone viral on Wall Street. Since September of last year, the S &P's Technology Software Index, it has shed 32 % of its value. That is a big drop in just a couple of months. Salesforce, as one example, it's down 26%. Adobe's lost 20%. dozens of mid-cap SaaS names have been cut in half. If you've been watching enterprise software stocks lately, you've been watching a sector get completely repriced.

0:37And if you've been an investor holding these stocks, your portfolio has not been fun to look at. But what if everyone panics and gets ready to dump their positions at the bottom of the drawdown? What if the worst is already behind us and now would be a good time to actually buy these stocks? I don't have a crystal ball and I'm not trying to call the bottom here, but here's what a contrarian would argue right now. They would say that the market is overreacted. The dominant narrative is factually broken, and they would say that investors who buy right now may be staring at some of the best entry points in a decade.

1:06But before we talk about what could happen in the future, we've got to unpack how we got here. The pains arrived in basically two distinct waves. The first one is macroeconomic. When the Federal Reserve raised interest rates at the fastest pace in history during 2022, long-duration assets across markets got crushed. And there are very few assets that carry more duration than a fast-growing software company because those cash flows price 10 years into the future. For example, the Bessemer Cloud Index saw the median public SaaS revenue multiple go from an all-time high of 18x forward revenue all the way down to 6x, and that happened from 2021 to 2026.

1:44That alone is a brutal reset. Just that metric saw a 65 % decrease by itself. The second wave of pain, that came from a structural issue though. Frankly, this one was far more alarming to investors, and it's the one that's been dominating headlines. The best way to understand it is that the rise of AI agents introduced what analysts are now calling seat compression. What's that? The idea is that a single AI agent can perform the work of multiple employees. So enterprises need fewer software licenses. Well, where are we seeing that show up in the market? Atlassian saw its stock plunge 35 % after they reported their first ever decline in enterprise seat counts.

2:22Whoops. Workday announced layoffs of 8.5 % of its workforce and they directly cited AI as one of the contributing factors. If those examples weren't bad enough, the January, 2026 CIO survey, they found that it budget growth was expected to only be 3%. Most analysts argue that a big portion of budget growth was withheld. And the reason is because those dollars are being rerouted toward more than $660 billion in planned hyperscaler AI infrastructure spending. And that's obviously a big number. And when the market sees a big number attached to a scary prediction, they panic quickly. And that's exactly what's happened earlier this year.

2:58A good example is when price to sales multiples compressed from 9X down to roughly 6X in a matter of weeks. For context, the current levels are levels that we have not seen since the mid-2010s. But here's the thing. The sell-off in software stocks has not been uniform. Everyone is not being treated equally. There's a bifurcation between AI infrastructure software and traditional application software. Take Palantir. Palantir surged 135 % last year, and they saw 121 % year-over-year growth in their U.S. commercial revenue. Palantir also gave fiscal 2026 revenue guidance of$7 billion. That's a number substantially higher than analysts were expecting.

3:35So remember, good companies with real growth, they can buck nearly any trend. Other examples though include Microsoft Cloud crossing 50 billion in quarterly revenue and still growing 39 % year-over-year. Oracle Cloud Infrastructure grew 84 % in a single quarter and then they told the market that they had a$553 billion backlog. Think about that. It is very hard to argue that a company is not gonna be more valuable in the future when it claims to have half a trillion dollars of backlog. Now let's compare this to what happened on the other side of the market. A painful example has been Salesforce.

4:08They've seen a quarter of their market cap just disappear into thin air. Adobe's forward price to earnings multiple is compressed to roughly 10X. And that's even though the company's still growing revenue at 12 % annually. This low of a multiple usually implies that a business is in terminal decline, but they're growing 12 % annually. CrowdStrike, that's a fan favorite. They may be an even more confusing example. They're widely thought of as a structural winner in cybersecurity, yet they trade 20 % below their five-year average price of sales multiple despite having that dominant market position.

4:40And that dominant market position continues to grow more critical with every AI deployment. My big takeaway from these examples is that the market is treating all non-infrastructure software as damaged goods. This is where a contrarian would argue that the market is making a mistake. So what's going on here? The prevailing Bayer thesis assumes that AI will display SaaS. The pessimists believe that companies, particularly large enterprises, are going to stop paying for software subscriptions because AI agents are going to absorb the workload. Could that be true? Sure. Is it the obvious conclusion from the current facts?

5:11Absolutely not. A contrarian would argue that this logic has a fatal flaw, and it's because the incumbents are not standing still. These people aren't idiots. They are building the AI layer themselves, including their advantageous use of two decades of proprietary data, all of their customer relationships, and distribution that no startup can replicate overnight. Basically, incumbents only get disrupted if they don't disrupt themselves first. So let's go back to Salesforce. Their Agent Force AI agent platform hit$800 million in annual recurring revenue in fiscal 2026. They report that that is up 170 % year over year.

5:47That platform alone is now shifting to a consumption-based, outcome-driven pricing model. If it works and continues to scale, it's gonna be hard for a startup to compete with Salesforce's distribution advantages. Another one to pay attention to is ServiceNow's generative AI suite. They reported crossing$600 million in annual contract value, and they're on pace for a billion dollars by year end. It's hard to ignore a billion dollars in contract value. Then let's not forget Microsoft, the big dog of software. They launched a new M365 enterprise tier. They're pricing it at$99 per user per month. That's 65 % more expensive than their prior top tier plan.

6:23And they're hoping to capture AI value directly through their existing install base. So the bears may be loud right now, but these examples are not threats to the SaaS business model. Instead, they are the SaaS business model evolving into something more powerful and benefiting directly from the AI tech trend. Another important point here is that many of these companies are switching from an individual license revenue model to a consumption-based pricing model. The idea is to charge a customer by tasks completed or outcome delivered rather than by a user seat. This business model evolution combined with the fact that enterprise software spending is projected to grow 15 % this year makes it much more difficult for the people predicting the demise of software stocks.

7:02The company's best position to capture this increased spend are the ones with enterprise relationships, compliance infrastructure, and workflow integration that incumbents already own. Bain and Company's own research is confirming that customers overwhelmingly prefer to buy AI-enabled solutions that come from their existing vendors. It's common sense. Companies will buy from people they know and brands they trust, as long as that technology and costs are competitive. So what has to happen for the bears to be wrong here and software stock investors to be happy again? Well, this is where things can get a little complicated.

7:33There's no magic bullet. But instead, investors are going to need a few things to go right. First, AI monetization must cross the credibility threshold. Confidence in Salesforce is going to return if their agent force revenue surges north of a billion dollars of AR. ServiceNow needs Now Assist to clear a billion dollars in ACV. Microsoft needs to demonstrate that Copilot is lifting average revenue per user in a sustained measurable way. Those data points, which could arrive as early as the second half of this year, it's going to shift the market narrative from AI is disrupting SaaS to SaaS is monetizing AI.

8:05The second thing that needs to happen is various enterprise IT budget data sources got to confirm that there's been a net expansion in software spend despite the seat compression. This may be the most concrete way to disprove the bear thesis, and it's something that I'm personally watching very closely. And then lastly, we need stability in the macro environment. That's really going to matter. If interest rates go up, it's going to cause more pain for these software stocks. But if rates stay flat or go down, then I would expect some of the multiple compression headwinds to dissipate. This would then allow a true re-rating upwards to begin.

8:36But if the bears are wrong on these software stocks, How much money could you make as an investor potentially going forward? Well, the good news is that valuation multiples across popular quality software names, they're now the most compelling that they've been in years. Microsoft trades at roughly 24 times forward earnings, and they've got 14 % annualized earnings growth expected. The median Wall Street price target on Microsoft is$600. It's about 50 % higher than the current share price. Cloudflare has a similar situation. They have a median analyst target at$245. That'd be about 40 % higher from current prices.

9:08Snowflake, who's still growing revenue almost 30 % year over year, they trade at a 13X price of sales, yet the consensus target implies 43 % upside. These are not small numbers I'm talking about, and I'm not even using the highest analyst targets. But if you really want asymmetry, a contrarian would argue Adobe is perhaps the most asymmetric setup. They currently trade around 10X forward earnings with double-digit revenue and earnings growth. As I mentioned, the market is pricing structural decline for Adobe, but it's into a company that is still compounded. If Adobe reverted to a normalized 25x multiple, that would imply approximately 150 % upside before accounting for any earnings growth.

9:45There is example after example across the public markets of these situations. Analysts at multiple firms are projecting 40 to 50 % upside merely from multiple expansion alone. And it's coming for these quality software names that execute on AI monetization. And that's before you layer in earnings growth trajectories that would likely follow from a successful embracing of the new technology. Remember, the SaaSpocalypse is so overdone that the narrative assumes the industry is being disrupted into irrelevance. The data is telling a very different story though. Maybe the SaaS companies aren't being disrupted from the outside, but they're evolving internally into something more valuable with higher revenue per customer, lower marginal delivery costs, and a total adjustable market that's tripling over the next four years.

10:25Even Bill Ackman is saying that the market looks incredibly attractive right now. And if that's the case, the entry price for these companies has been put on a flash sale thanks to investor fear in recent weeks. The big question now is whether that fear will have been warranted in hindsight. That's it for today's show. Thank you guys so much for watching. Please remember to subscribe on YouTube and I'll see all of you live from the desk of Anthony Pompliano tomorrow.