AI sparked fears about the future of software, but what do the company results show? A look at the selloff, changing valuations, and how established platforms are incorporating AI.
Earlier this year, software stocks were among the market’s biggest casualties as investors feared AI would kill the industry. Many believed AI could undermine traditional platforms, automate coding, and shrink demand for software products. Investors are increasingly recognizing that AI may enhance software rather than destroy it.
Valuations have fallen dramatically, yet many software businesses continue to deliver revenue growth, rising profits, durable margins, and improving earnings estimates. Meanwhile, established platforms retain valuable advantages in customer data, distribution, and deeply embedded workflows. Rather than making these companies obsolete, AI could strengthen their products and open new growth avenues.
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The Software Decline
The software sector, measured by the iShares Expanded Tech-Software Sector ETF (IGV), fell up to 38% in early 2026, while some individual names fell up to 80% from their highs.
The prevailing narrative was straightforward: generative AI posed an existential threat to traditional software. If AI could write code, automate workflows, and replace entire categories of software spending, then the premium valuations investors had assigned to the sector for years suddenly looked impossible to justify.
The Current Trends
The correction reset valuations. Expectations have fallen, and the feared destruction of the software business model has yet to materialize. In fact, for some companies, AI may ultimately become another growth driver rather than the existential threat investors initially feared.
Some software companies are still generating strong double-digit sales growth, rapidly expanding earnings, and maintaining some of the best business economics in the market. The major difference is that investors no longer have to pay the extraordinary valuations they did just a few years ago.
SaaS (Software as a Service) Needed to Correct and What Comes Next
For years, software stocks commanded some of the market’s richest valuations. Investors paid enormous premiums for recurring revenue, high gross margins, strong cash generation, and long runways for growth.
By 2021, those premiums had become extreme. The median publicly traded B2B SaaS company reached nearly 17x annual recurring revenue, compared with a more typical range of roughly 8x to 11x before the pandemic. They are exceptional businesses, but at some point the valuations became too difficult to justify. The correction was inevitable, but in many cases, it appears to have gone too far.
Many of these companies continue to grow revenue at attractive rates, earnings estimates are climbing, and margins remain fat. Yet their valuations have compressed dramatically. In other words, the fundamentals investors once paid enormous premiums for have not necessarily disappeared, but in many cases, the premium has.
That does not mean every beaten-down software stock is suddenly attractive. But when the fundamentals make sense without requiring an aggressive AI forecast, successful AI adoption becomes a bonus.
Mark Notes
Writing code is only one part of building a successful enterprise software platform. Customer data, integrations, distribution, existing workflows, and years of institutional adoption are much harder to replicate. AI may dramatically reduce the cost of creating software, but that doesn’t necessarily mean customers will abandon platforms already embedded throughout their businesses.
Recent Salesforce (CRM) results are an example. In its latest quarter, revenue grew 11% year over year, subscription and support revenue increased 12%, and current remaining performance obligations accelerated to 14% growth. More importantly, Salesforce’s Agentforce and Data 360 businesses reached nearly $3.9 billion in annual recurring revenue, up more than 210% year over year, while management raised its full-year revenue outlook. That hardly looks like a business being displaced by AI.
This article is for general informational and educational purposes only. It is not intended as financial advice, investment guidance, or a recommendation to buy or sell any security. The content reflects publicly available information and broad market commentary. Readers should conduct their own research and consult a licensed financial professional before making investment decisions.
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