Dan Ives Says Software Stocks Just Saw Their Most Disconnected Sell-Off Since the Late 1990s. Here's Why He's Still Bullish.

Software stocks have taken a beating this year over fears of competition from artificial intelligence (AI). Shares of Microsoft (NASDAQ: MSFT), Salesforce (NYSE: CRM), and ServiceNow (NYSE: NOW) have underperformed the broader market this year, down as much as 29% year to date as of this writing.

But in a CNBC appearance earlier this year, top tech analyst Dan Ives saw the sell-off as the most disconnected from business fundamentals he has seen since the late 1990s. Recent earnings results have supported Ives' bullish view and suggest Wall Street might be wrong to discount these stocks.

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Strong fundamentals support the bull case

Microsoft stock is roughly flat so far this year, underperforming the Nasdaq Composite's 11% return. This is despite the software giant reporting a strong 18% year-over-year increase in revenue last quarter, with surging demand across its Azure enterprise cloud platform and paid Microsoft 365 Copilot seats, which now exceed 30 million.

ServiceNow is another underperformer, down 24%. Yet the workflow automation leaders' subscription revenue continues to grow at high rates, up 23% in constant currency in the second quarter. The company closed 123 deals worth over $1 million, with strong momentum in AI-related contracts.

Salesforce posted a 14% year-over-year increase in first-quarter revenue -- beating the consensus analyst estimate for the second straight quarter. Current remaining performance obligations reached nearly $34 billion. Like Microsoft and ServiceNow, Salesforce is seeing momentum in AI-related products. It signed a record 98 deals worth over $1 million in new annual contract value.

These results show that customers are turning to software providers they already know and trust to handle AI integration, workflows, and security in their operations. This validates Ives' view that software is the "heart and lungs" of the AI build-out.

Risks to watch

Microsoft, ServiceNow, and Salesforce are providing the data, security, and workflow orchestration that enable AI models to perform productive work.

Still, investors will have to watch for possible headwinds these companies face. For example, Microsoft is investing heavily in AI infrastructure to expand data center capacity that could pressure its near-term earnings. Microsoft spent $41 billion in capital expenditures last quarter alone.

Moreover, as AI agents become more widely adopted and capable of completing increasingly complex projects, they could reduce the need for companies to purchase additional software licenses (user seats), thereby pressuring software companies' revenue growth.

However, Ives' view that these leaders will be difficult to replace because of their deep integration with enterprise systems is holding up. Analysts are still maintaining their long-term earnings growth estimates for these companies. The recent sell-off in top software stocks looks more like a buying opportunity than a reason to sell.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft, Salesforce, and ServiceNow. The Motley Fool has a disclosure policy.