Enterprises Are Spending 15% More on Software in 2026, Thanks to AI. Here's How to Profit.
Key Points
Gartner expects enterprise software spending to reach $1.4 trillion this year.
Microsoft is generating a growing mountain of cash, which provides ample funds to invest in AI innovation.
ServiceNow expects another strong year of growth, as it sees growing demand for its AI-powered Now Assist platform.
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Software stocks have had a tough start to the year as investors worry that artificial intelligence (AI) could reshape the industry. New AI agents can complete tasks on their own and write code, lowering the barriers to building software and potentially increasing competition for incumbents. Still, companies with deep customer relationships are more likely to use AI to strengthen their platforms and increase their value to investors.
Enterprise spending on software is expected to keep growing. A recent Gartner report projects enterprise software spending will increase by at least 15% to $1.4 trillion this year. Microsoft (NASDAQ: MSFT) and ServiceNow (NYSE: NOW) have both sold off this year, yet their latest earnings reports show solid momentum in their respective businesses.
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Microsoft
Microsoft is used by millions of people and businesses every day. Its flagship products, including Office, have faced competition from free, open-source alternatives for years, yet Microsoft has continued to grow revenue in its productivity segment.
Customers are willing to pay more for premium features, following Microsoft's launch of Copilot features across Excel, Word, and other software products. In the December-ending quarter, Microsoft 365 commercial cloud revenue rose 17% year over year, helped in part by growth in average revenue per user. The growth in revenue per user indicates that customers are finding greater value in Microsoft's offerings as it rolls out new AI features.
Enterprises are also turning to Microsoft Azure for cloud services. Microsoft recently introduced its Maia 200 AI chip, aiming to lower compute costs and improve efficiency for customers running AI workloads. Revenue from Azure surged 39% year over year last quarter.
There is competition in the AI cloud market, and it's not entirely clear how AI agents will shape the software industry over the next several years. But with $160 billion generated in cash flow over the past year, Microsoft's greatest competitive advantage might be its financial fortitude. The companies that have money to spend on data centers and chips will be in a solid position to stay on the cutting edge of AI, launch new innovations, and reward their shareholders over the long term. Microsoft is elite in turning its products into cash flow.
After the pullback, the stock trades at roughly 24 times forward earnings, with analysts still expecting around 14% annualized earnings growth. This is an attractive P/E-to-growth ratio for Microsoft.
ServiceNow
ServiceNow helps businesses automate a wide range of tasks, including customer service requests, app development, and IT support. The company generates virtually all of its revenue from subscriptions, which has led to steady growth in revenue and free cash flow over many years.
The stock is down 33% year to date, as investors fear competition from new AI agents taking share from ServiceNow. But there's no sign of weakness in the company's fourth-quarter results. Subscription revenue was up 21% year over year, only slightly below its three-year average growth rate. It made 35 deals valued at $1 million or more for its AI suite, Now Assist.
Management noted accelerating new business deals and "substantial growth" in licensed users, workflows, and transactions. Notably, it guided full-year 2026 subscription revenue to be up 20.5% to 21% year over year. This guidance is significant because if management were seeing a slowdown in deal momentum, it would show up in its outlook. Instead, management is focused on beating its guidance.
AI is evolving quickly, but ServiceNow is on offense, playing a role in how this technology will shape the future. "We are building the AI control tower for business reinvention so enterprises can operate securely in an agentic AI world," said CEO Bill McDermott.
The stock's recent collapse has pushed the forward P/E down to about 25 -- attractive for a company still guiding for strong growth. Before the decline, the stock traded around 50 times forward earnings. Given management's strong outlook, it looks worth buying at these levels.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and ServiceNow. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
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