Software Stocks Facing Sell-Off: Should Investors Reconsider?

As of 2025, fears surrounding government cutbacks and a potential economic slowdown have led to a significant sell-off in several prominent software stocks. Additionally, the anticipated benefits from artificial intelligence (AI) have notably lagged, leaving investors cautious about the software sector’s prospects. Notable names like ServiceNow Inc. (NOW), Salesforce Inc. (CRM), and Adobe Inc. (ADBE) have experienced substantial declines, with shares down 21%, 16%, and 11%, respectively. The iShares Expanded Tech Software ETF (IGV) has similarly faced a dip, falling 6%. In light of these trends, many are left pondering whether now is the right time to reenter the sector.

Analysts at Bernstein highlight a potential silver lining in this murky landscape, particularly as a federal focus on efficiency could inadvertently benefit certain software companies. Their analysis indicates that not all software stocks are created equal, and investors need to adopt a selective approach in evaluating which firms have the potential for growth in the current environment.

ServiceNow: A Short-Term Challenge with Long-Term Potential

ServiceNow is particularly sensitive to the evolving government landscape, with approximately 8% to 9% of its revenue sourced from federal customers. The current push for efficiency within governmental agencies raises concerns about potential layoffs and subsequent reductions in software licenses — an important revenue stream for ServiceNow, which charges clients based on the number of employees using its software.

However, Bernstein analysts suggest that once the dust settles from any immediate disruptors, companies may prioritize productivity tools to effectively manage with a smaller workforce. As firms reconsider resource allocations, ServiceNow could find itself positioned favorably, given that its current shares are trading at what analysts refer to as a “rare discount.” They posit, “Long term we continue to think this is the ‘next Microsoft.’ If you can deal with short-term volatility, we encourage owning it now, even if picking the bottom might be hard.”

Adobe: A Cautious Outlook Amid Increasing Competition

Despite its challenges, Bernstein analysts express optimism about Adobe’s long-term potential but caution that it may take time for market sentiment to turn in the company’s favor. They contend that investor skittishness stems from intense competition and the confusion created by the company’s restructuring efforts, which have lacked comprehensive historical data to shed light on the changes.

Looking ahead, the analysts believe that if Adobe can either meet or surpass expectations for its AI-driven annual recurring revenue, it could provide a much-needed boost to its stock. Meanwhile, maintaining stable revenue growth will also be closely scrutinized by investors. The presence of Adobe’s CFO making a rare stock purchase signals some degree of optimism, but whether that translates into significant gains remains to be seen.

Cybersecurity: Resilience in the Face of Uncertainty

The cybersecurity sector, represented by firms like Palo Alto Networks Inc. (PANW) and Zscaler Inc. (ZS), appears to be a more resilient option amidst the current turmoil in the software space. Bernstein analysts assert that while cybersecurity often operates on seat-based pricing, these firms face less exposure from federal agencies compared to enterprise software counterparts.

For Palo Alto Networks, recent comparisons have posed challenges, but analysts believe upcoming quarters could present easier benchmarks to surpass. In contrast, Zscaler has improved its sales strategy and benefitted from market demand, leading to a commendable 17% increase in its stock value so far this year. Although Palo Alto’s stock shows a slight increase year-to-date, it has faced marginal declines in recent months.

Salesforce: Challenges and Caution

Interestingly, Bernstein remains cautious about Salesforce’s stock, assigning it an underperform rating. Analysts note that while hopes surrounding the company’s Agentforce — stemming from AI advancements — have buoyed investor sentiment, they caution that the realization of this technology is still in the early stages. Even if agentic AI becomes a major growth driver, it could be some years before it takes effect meaningfully.

Furthermore, slowing organic revenue growth across Salesforce’s broader business presents additional challenges. As the software sector wrestles with a transformative landscape, investors are encouraged to be discerning in their selections, keeping a keen eye on both near-term risks and long-term advancements.

Conclusion: A Time for Caution Yet Potential Opportunity

With multiple dynamics at play in the software sector, from government efficiency initiatives to evolving competitive landscapes, investors face a blend of risks and opportunities. While fears of short-term volatility looms, notable players like ServiceNow, Adobe, and Zscaler may represent brighter spots for those looking to cautiously re-enter the sector. Careful evaluation of each firm’s fundamentals and market positioning will be crucial in navigating these waters.