Software Bear Market: 1 SaaS Stock To Buy Now, 1 To Avoid

Software stocks are beginning to crawl out of a deep hole, following a brutal sell-off over the last two weeks. The panic picked up following less-than-perfect earnings reports from sector leaders like Microsoft and ServiceNow and as fears of agentic AI disruption were accelerated by Anthropic's release of Claude Cowork, a tool that can be used to easily create customizable software programs similar to those on the market.

Dozens of software stocks are down sharply from their peaks now, but not every one is a buy. Keep reading to see one software-as-a-service (SaaS) stock worth buying now, and one you're better off avoiding.

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The software stock to buy: Axon Enterprise

Axon Enterprise (NASDAQ: AXON), which makes TASER electrical weapons, body cameras, and a wide range of software products for law enforcement agencies, has been a top stock on the market for over a decade as it's built a unique business model in a niche industry.

However, after the recent sell-off, Axon stock is now down about 50% from its peak six months ago and down 25% from where it was two weeks ago.

Axon isn't your typical software stock. It combines hardware and software, much like Apple, to create a resilient and sticky product ecosystem that locks customers in. Its software is designed to process footage from its body and dashboard cameras, and the company even has a new generative AI product, Draft One, that writes first drafts of police reports based on that footage.

In addition to its hardware business, the company seems more insulated from the tumult in the software industry because of its customer base, which is primarily state and local law enforcement agencies. Unlike Fortune 500 companies or small businesses, law enforcement agencies aren't necessarily trying to develop their own custom software based on AI, and they're under different cost constraints than private businesses, as there's no profit motive. As long as Axon's software suite works for their needs, they're likely to continue to use it.

Axon is growing quickly, and it's expanded through acquisitions into areas like drones and 911 emergency services, building out a more comprehensive product portfolio to provide complementary services.

Recent results have been strong, with revenue expected to grow 31% for 2025 to $2.74 billion. Even after the sell-off, Axon remains expensive at a price-to-sales ratio of 14, but that looks like a good price to pay for a company with strong competitive advantages and a long runway of growth in front of it.

The software stock to avoid: Atlassian

While Axon caters to a relatively small set of customers, Atlassian (NASDAQ: TEAM), which makes collaboration and ticket-management software under brand names like Jira, Confluence, and Trello, caters largely to small and medium-sized businesses.

The company finished its most recent quarter with more than 350,000 customers, including 80% of the Fortune 500.

Atlassian reported solid revenue growth, up 23% to $1.6 billion in the fiscal second quarter, and it guided to 22% revenue growth for the full year. Atlassian stock is down 72% over the last year on fears about AI, and while the company has pushed back on them, the market reaction seems valid.

For example, in a LinkedIn post five months ago, Klarna's CEO Sebastian Siemiatkowski said his company was leaving Atlassian after Klarna "vide-coded" a better ticket-management system.

Atlassian's software is priced like a premium product for the hundreds of thousands of businesses it serves, and many of them are likely to experiment with AI, now that it's so easy to do so.

As AI tools advance, Atlassian will likely come under more pressure, and the company has been unable to escape the SaaS share-based compensation trap as well.

Despite bringing in close to $6 billion in annual revenue, the company is still losing money on a generally accepted accounting principles (GAAP) basis, and it has been GAAP unprofitable for the last 10 years. Investors have been willing to overlook that as the company is profitable after backing out share-based compensation, but that's a real expense. It either dilutes shareholders or is offset with share buybacks, a cash expense that the company has promised to do more of, presumably because the stock is down. In the first half of its fiscal year, it spent more than $800 million, or nearly 30% of revenue, on stock-based comp.

Atlassian might seem cheap after the recent sell-off, but its products look like a prime target for AI disruption, and its business has never demonstrated profitability. The software bears are right on this one. Atlassian is better off avoided.

Jeremy Bowman has positions in Axon Enterprise. The Motley Fool has positions in and recommends Apple, Atlassian, Axon Enterprise, Microsoft, and ServiceNow. The Motley Fool has a disclosure policy.