My Top 3 Software Stocks to Buy on the Dip

Software companies have not performed well recently. One reason is that many investors believe artificial intelligence (AI) will replace their products and services, leaving their businesses struggling. However, many software stocks, rather than being replaced by AI, are actively adapting to the technology. Some will do so successfully and rebound from their recent declines. It would be wise to consider investing in leading software stocks that can bounce back before the rebound happens. Let's consider three options: Microsoft (NASDAQ: MSFT), Shopify (NASDAQ: SHOP), and Veeva Systems (NYSE: VEEV).

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1. Microsoft

Microsoft is unquestionably one of the most successful software companies of all time. Having been around for decades, it has survived -- and been strengthened by -- multiple technological revolutions. For instance, the company had the foresight to launch a cloud computing business that is now one of its biggest growth drivers. Microsoft could do the same with AI as it incorporates the technology into its famous productivity suite. The company recently introduced Microsoft Scout, a personalized, autonomous AI agent that will be integrated into its apps and perform many tasks behind the scenes to help boost productivity.

Will Microsoft Scout be successful? Maybe not, but even if it isn't, the company will regroup and try again. One of Microsoft's advantages is its deep, long-standing enterprise relationships. It is trusted by millions of businesses worldwide, which grants it a leg up in launching AI agents, gathering real-world feedback on how companies use them, and making adjustments as needed.

Beyond that, Microsoft's core business is performing well. The company's revenue and earnings are growing at a good clip, and it remains well-positioned to ride the growth of the cloud computing industry -- partly thanks to its AI-related work -- for a very long time. On top of that, the stock also offers a strong dividend program. For all those reasons, Microsoft is a top pick on the dip.

2. Shopify

Shopify, a leading e-commerce company, has also launched a suite of AI tools. They help merchants on the company's platform build online storefronts faster, write product descriptions, create logos, and much more. These initiatives can help companies launch and scale their businesses more rapidly and better connect with their customers, boosting Shopify's gross merchandise volume and revenue.

The e-commerce leader appears to be adapting to the new AI world order just fine, but many investors remain skeptical of its prospects. In fairness, that's because of reasons that go beyond the potential impact of AI on its business. Shopify's financial results may be strong, but the company's valuation leaves little room for error. Shopify is trading at 65x forward earnings, versus an average of 21.4x for information technology stocks.

At these levels, the stock may dip at any sign of trouble, and that's what happened when Shopify reported its first-quarter earnings and posted guidance that implied decelerating top-line growth. Even with these caveats, the stock looks attractive to investors focused on the long game. Shopify is a leader in its niche of the e-commerce market; it powers 30% of online businesses in the U.S. and boasts a competitive advantage thanks to high switching costs.

Further, given the industry's long runway for growth, Shopify is well-positioned to ride that tailwind and improve its financial results over the long term. Shopify is worth a premium (it has historically traded at high valuation multiples) given its growth prospects. Patient investors who purchase its shares on the dip may see outstanding returns over the long run.

3. Veeva Systems

Veeva Systems is a cloud computing company that specializes in crafting products catered to the life sciences industry. Generic cloud solutions won't work for these corporations, given the unique demands of the sector, including the stringent regulatory rules they must navigate while seeking to bring products to market. Veeva Systems built its cloud products with these demands in mind, which is why the company is highly popular among leading pharmaceutical and biotech players.

Veeva Systems has also started integrating AI into its solutions. It launched Veeva AI, a layer of AI agents embedded across Veeva's applications to automate work.

This initiative could help boost the company's business and allow it to tap into the large opportunity remaining in its niche of the cloud industry. Veeva Systems estimates a total addressable market worth $20 billion across its business -- it has generated just $3.3 billion over the trailing-12-month period.

Veeva Systems' addressable market should expand along with the healthcare sector. Further, the company benefits from a competitive moat driven by high switching costs. For companies that rely on its cloud solutions for critical day-to-day tasks, it isn't easy to jump ship. In short, Veeva Systems' business could survive AI and even thrive thanks to it, while performing well over the medium term. That's why the stock is attractive, especially after its significant decline.

Prosper Junior Bakiny has positions in Shopify. The Motley Fool has positions in and recommends Microsoft, Shopify, and Veeva Systems. The Motley Fool has a disclosure policy.