Top software stocks have slumped this year amid the lingering concerns that artificial intelligence tools by companies like OpenAI and Anthropic will hurt their revenue growth in the long term. ServiceNow (NOW) stock is down by 35% this year, while Salesforce (CRM), Workday (WDAY), and Adobe (ADBE) have fallen by over 40%.

NOW, CRM, WDAY, and ADBE have gone through a valuation reset

The ongoing software slump has made these companies affordable to most people. A good example of this is by comparing their current valuations with that of the S&P 500 Index and their historical levels.

The S&P 500 Index has a forward price-to-earnings ratio of 23. In contrast, Workday’s figure has dropped to 11, much lower than the sector median of 24 and the five-year average of 40. This valuation reset is happening even though Workday operates in essential industries that are hard to automate using AI agents. 

Valuations have compressed sharply across the sector. ServiceNow trades at a forward P/E ratio of 24, compared with its five-year average of 61. Adobe’s forward P/E stands at 8.3 versus a five-year average of 27, while Salesforce’s multiple has fallen to 11 from a historical average of 31.

The same is happening among other SaaS companies like Intuit, AppLovin, Trade Desk, and Oracle. 

SaaSPocalypse and focus on memory

The ongoing valuation reset in the software industry is mostly because of a situation known as SaaSPocalypse. This is the fear that advanced AI models will help companies replace these software companies. 

The reality, however, is that the recent results showed that software companies are still growing. For example, ServiceNow’s revenue jumped by 22% in the first quarter to $3.7 billion. 

Its subscription revenue soared by a similar amount to $3.67 billion, while the management boosted the forward outlook. Analysts predict that its annual revenue will rise 22% this year and 19% in the next financial year.

Workday’s annual revenue is expected to grow by 11% this year and 10% in 2026, while Salesforce will grow by a similar rate in the next two years. Salesforce’s revenue growth, however, should be taken with a grain of salt as it involves some large buyouts like Informatica and Fin.

Adobe, despite being highly exposed to the AI disruption, is expected to grow by 11.5% this year and 9% next year. These revenue growth metrics are all lower than their historical levels. Nonetheless, they are still strong for companies that have matured.

SaaS stocks will likely improve in the coming months as investors go bargain hunting. As mentioned above, most of these firms are trading at substantial bargains compared to their historical levels. 

Most importantly, there will soon be a rotation from the booming memory stocks like Sandisk, Micron, Seagate, and Western Digital. Investors who have been in the market for many years have seen this rotation happen many times before.

At the same time, while some industries will be disrupted by AI, others will thrive. We have already seen some software companies successfully launch AI tools to complement their current offerings. A good example of this is Salesforce, which launched Agentforce that is now being used by thousands of companies.

Software companies will also leverage AI tools to simplify their operations and reduce their human resource expenses. Therefore, the ongoing selling of software stocks like NOW, WDAY, ADBE, and CRM will likely be a good buy-the-dip situation.

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