The Tech Sector Wall Street Is Shunning Right Now for All the Wrong Reasons

Tech stocks have been some of the biggest winners in the current bull market. That growth is primarily fueled by the advancing capabilities of artificial intelligence (AI), which holds the promise to improve productivity and reduce costs for businesses across practically every industry. For the most part, investors are optimistic about almost every sector of the market.

But one tech sector has been headed in the opposite direction recently over fears of how AI could disrupt it. The market has indiscriminately sold off shares of software stocks over the last few months. The iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV) is down 30% since the end of October. But a fear-stricken market may be an incredible opportunity for patient long-term investors.

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Why is the market suddenly selling software stocks?

There's growing concern among Wall Street analysts that generative AI is more foe than friend for many software companies. Those fears have been exacerbated since the start of 2026 by a few new software releases from large language model developer Anthropic.

In January, it released Claude Cowork, built on top of its Claude Code agent. Cowork is a workplace productivity feature now included in Anthropic's Pro plan. This month, it added a plug-in for Cowork to support legal work like contract reviews and compliance enforcement.

The fear is that Anthropic and other AI-first companies present a new competitor to entrenched enterprise software providers. As a result, they could put pricing pressure on these software businesses and push them to spend more on research and development -- all while sales slow or move in the wrong direction. After all, why would a business pay Atlassian (NASDAQ: TEAM) for services they can replicate with Anthropic's Claude for less money?

With growing uncertainty about future earnings of software companies, investors don't know how much to value current financial results. That's led to multiple compression, with the forward price-to-earnings ratio (P/E) of many software stocks falling to levels well below the market average.

This may have given investors a great opportunity to be greedy when others are fearful.

The market is probably overreacting

The huge sell-off in software stocks appears to be overdone. Many enterprise software packages come with high switching costs, making it costly and difficult to change vendors, and many companies develop wide competitive moats.

The best software-as-a-service (SaaS) stocks have gross retention rates usually very close to 100%. If you look at net revenue retention, which shows how much last year's customers spent this quarter, many SaaS companies will show numbers above 100% as they sell more services and add more users to existing ones.

Those numbers point to the fact that most businesses don't have any interest in switching software providers -- the cost is too high. They would have to retool entire workflows and retrain employees. And that would come with the risk that a new solution won't work the same or be able to accomplish the same goals as the previous solution.

As a result, many software companies could have much more predictable future earnings than investors think. What's more, the ability to build on the momentum and development of AI services like Anthropic's could further entrench the biggest software companies as winners.

These three stocks look like incredible values right now

While investors could simply buy the iShares software ETF, digging a bit deeper to find companies with strong competitive positions and attractive valuations could be an even better opportunity. Here are three software stocks that look particularly attractive right now.

Microsoft

Microsoft (NASDAQ: MSFT) saw its share price tumble after its recent fiscal second-quarter earnings report. Investors are concerned about its spending on cloud computing capacity, but they may be ignoring the strength of its software business. Sales of Microsoft 365 Commercial climbed 14% year over year, and consumer sales climbed an impressive 27%.

Sales of Dynamics 365 climbed 17%. That double-digit growth (on a huge sales base) is driven by Microsoft's AI integrations with its core enterprise software.

The cash flow from that business is plenty to fuel the continued investment in the cloud. With its forward P/E falling to just 24, the stock trades at its lowest valuation in years.

Atlassian

Atlassian is another interesting opportunity. It's pushing its customers to use its cloud-based workplace productivity platform, where it's able to integrate more generative AI features.

The move has the potential to reduce overall costs for the business by simplifying the code its developers need to maintain while increasing revenue. Management said net revenue retention for its cloud-based customers was 120% in fiscal 2025.

That momentum should continue into 2026 and through its transition to a cloud-only service in mid-2029. The stock currently trades for just 21 times forward earnings estimates despite management's outlook for 18% revenue growth and expanding operating margin over the next year.

Adobe

Another opportunity is Adobe (NASDAQ: ADBE). The company behind Photoshop, InDesign, and Lightroom has seen its stock beaten down over the last few years amid fears of AI displacing its software's main uses. But management has expanded the top of its sales funnel with the release of Adobe Express and the integration of its own AI tools built on its Firefly model.

The switching costs for its Creative Cloud are considerable, as its tools and formats are considered a standard in the industry. As such, it's been able to push its annual recurring revenue higher at a double-digit pace, supported by new premium AI features.

Management says AI-influenced products accounted for one-third of its annual recurring revenue last quarter. Amid the sell-off, investors can now buy the stock for less than 12 times forward earnings estimates.

There are lots more opportunities out there. Many software stocks have much wider moats than the market is giving them credit for, making their current valuations look like incredible bargains.

Adam Levy has positions in Adobe and Microsoft. The Motley Fool has positions in and recommends Adobe, Atlassian, and Microsoft. 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.