Tech Sell-Off: Wall Street Sees 60% or More Upside for These S&P 500 Stocks

The S&P 500 is down about 6.5% year to date, and much of the selling pressure has been concentrated in technology. The Nasdaq Composite is off nearly 10% as investors factor in the risk that artificial intelligence (AI) agents could pressure demand for software from some industry leaders. That fear isn't baseless. But for large, enterprise-grade platforms, AI is more likely to increase their value to customers.

This is why Wall Street analysts still see significant upside for ServiceNow (NYSE: NOW) and Microsoft (NASDAQ: MSFT). Analysts aren't always right, but there are good reasons these companies could be rewarding investments for patient investors.

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ServiceNow: 80% Upside

ServiceNow stock has slid 58% from its previous highs. Investors are concerned that AI agents could render ServiceNow's workflow automation tools unnecessary. However, agents still need to be monitored, assigned, approved, logged, and measured. That's the real value ServiceNow brings to large organizations.

Analysts are still largely bullish. Out of 46 analysts covering the stock, 42 rate it a buy, with an average price target of $188, implying about 80% upside from today's price.

Market participants might be significantly underestimating how deeply embedded ServiceNow is with enterprise customers. ServiceNow's platform integrates with leading cloud services, making it easily available to large organizations. On the fourth-quarter earnings call, management disclosed it had 85 billion workflows in flight among Fortune 2000 companies.

This reliance shows up through strong financials. In the fourth quarter, ServiceNow reported a 21% year-over-year increase in subscription revenue. It generated over $2 billion in free cash flow from $3.5 billon in total revenue in the quarter -- a stellar 57% free-cash-flow margin.

If companies were ditching ServiceNow for an alternative, it would show up in weakening revenue growth or guidance. Instead, management still pegs its long-term addressable market at $600 billion and expects 2026 subscription revenue to grow nearly 20% year over year -- in line with recent trends.

No one can predict exactly how AI will shape the software industry in 10 years. But based on ServiceNow's customer stickiness, recent financial results, and growth outlook, the stock appears undervalued. Shares trade around 24.5 times forward earnings, well below the stock's three-year average multiple of 53. If ServiceNow keeps executing and the market eventually regains confidence, a mix of earnings growth and multiple expansion could drive gains of 80% or more over the next few years.

Microsoft: 63% Upside

Microsoft stock is down 35% from its highs, but analysts still like the company's momentum in cloud and AI. Most analysts covering the stock rate it a buy, with an average price target of $589, implying about 63% upside.

Microsoft Cloud revenue grew 26% year over year last quarter. This revenue includes sales from Azure, Microsoft 365 commercial, and other services. Management said the results reflected "accelerating demand," which doesn't point to weakness but a strengthening competitive position. This growth showcases Microsoft's opportunity to leverage its large customer base to bundle AI features across the products businesses already use.

Just as important, management is seeing strong demand for multiple computing workloads, customer segments, and geographic regions. It also reported that demand continues to exceed available compute capacity for AI requests. This is not a business on defense, but one leaning into the growth opportunities ahead.

The key risk for investors is whether productivity software, such as Office, eventually faces stronger price competition from cheaper alternatives. This could be one of Microsoft's most vulnerable areas, as it faces competition from cheaper AI-generated alternatives.

But so far, demand is holding strong. Microsoft reported that Microsoft 365 consumer cloud revenue rose 29% year over year. Importantly, it credited part of the growth to higher average revenue per user -- a sign customers are paying up for AI features like Copilot. This might be the best evidence that AI is enhancing the company's growth potential rather than derailing it.

Valuation also looks more reasonable after the pullback. The stock trades around 22 times this year's earnings estimate, below its three-year average forward multiple of 31. If Microsoft continues turning AI demand into durable revenue growth, it's not hard to see the stock moving toward analysts' targets.

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 has a disclosure policy.