2 Software Stocks to Buy That Are Down More Than 35% From Their Records

By mid-January, ServiceNow (NYSE:NOW) and Adobe (NASDAQ:ADBE) were already two of the five worst-performing stocks in the S&P 500 (SNPINDEX:^GSPC) in 2026.

Investors feared that artificial intelligence (AI) agents might handle work that many software companies charge for one user, or "seat," at a time.

ServiceNow trades near $141 as of this writing, about 40% below its record close in January 2025. Adobe, at about $242, is about 65% below the record it hit in November 2021.

But both companies are still growing by double digits. And I think AI fear explains only part of each drop -- in ServiceNow's case, maybe not even the biggest part.

Image source: Image source: The Motley Fool.

1. ServiceNow's slide is mostly about valuation

Showing how steady demand has been at the enterprise workflow software company, ServiceNow's subscription revenue has grown more than 20% year over year for three quarters in a row. Growth was 21% in the fourth quarter of 2025, 22% in the first quarter of 2026, and 24.5% in the second quarter.

But the latest number got some help. Management's guidance had built in about 1.25 percentage points of growth from Armis, a cybersecurity firm ServiceNow bought in April, and U.S. federal customers pulled some revenue forward from the third quarter, for which management expects subscription growth of 20.5%.

Profits are keeping pace. ServiceNow's non-GAAP (adjusted) operating margin improved to 31% last year, up from 29.5% in 2024, and management is calling for 31.5% this year. It also expects free cash flow to be about 35% of revenue. And the company spent about $2.2 billion on buybacks in the first quarter, after its board added $5 billion to its repurchase authorization in January.

So why is the stock down so much? I think it's mostly the price investors paid at the top.

At its January 2025 record close, ServiceNow stock cost about 84 times its 2024 adjusted earnings per share. Adjusted earnings per share over the past four quarters are about 35% higher than that 2024 figure. Yet shares today cost about 37 times those adjusted earnings.

Granted, AI worries added to the slide. But shares were already about 35% down from their peak by the end of 2025, before this year's software sell-off. And the stock's worst day this year, an 18% drop in April, came after the company said conflict in the Middle East had pushed back several big deals.

2. Adobe's results don't show AI damage yet

Adobe's decline looks more closely linked to AI. Shares fell more than 21% in 2025 and are down about 31% so far in 2026, as investors feared that AI lowers the barrier to entry in design.

But the creative software company's results haven't shown that damage. Its subscription revenue climbed 14% year over year in the fiscal third quarter of 2026 (the period ended Aug. 28, 2026), the same rate as in the fiscal second quarter. And annualized recurring revenue (ARR) from its AI-first products rose more than 150%. Adobe also produced a third-quarter record of $2.52 billion in operating cash flow, up about 15% year over year, and spent about $2.2 billion on buybacks. Helped by a falling share count, adjusted earnings per share grew 15% to $6.13.

There are signs of a slowdown, of course. Total ARR rose 11.2% in fiscal Q3, and management's full-year target calls for 10.2%. Adobe's adjusted operating margin also dipped to 44% from about 46% a year before.

But at about $242, Adobe stock sells for about 10 times management's fiscal 2026 target for adjusted earnings per share. Investors paying that price seem to expect Adobe's growth to cool fast.

Time to buy?

ServiceNow shares aren't cheap at about 28 times expected 2027 earnings. But for a business growing subscription revenue roughly 20% with slightly rising margins, I think the price is fair.

The number I'd track is current remaining performance obligations, the contract revenue ServiceNow expects to recognize in the next 12 months. That figure rose 21% in the second quarter, and management sees 19.5% growth in the third.

Adobe, at under 9 times its expected fiscal 2027 earnings, asks even less of its business. If its ARR growth keeps falling toward the single digits, that low valuation might end up being fair.

Ultimately, I don't think AI fear explains either discount by itself. At these prices, I think both stocks are worth considering -- and maybe bought bit by bit instead of all at once.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and ServiceNow. The Motley Fool recommends the following options: long January 2028 $330 calls on Adobe and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.