Software stocks have fallen into bear market territory, but analysts believe Microsoft and Cloudflare are undervalued. Microsoft is leveraging AI in its software and cloud computing businesses, with a 52% upside implied by the median target price. Cloudflare is poised to benefit from AI agents, with a 40% upside implied by the median target price.

The S&P North American Technology Software Index has dropped 32% from its peak, driven by concerns around AI disrupting the industry. Companies like Anthropic are introducing AI tools that automate work across various departments. Experts, including Nvidia’s CEO, see the sell-off as illogical, creating a buying opportunity for patient investors eyeing undervalued stocks like Microsoft and Cloudflare.

Microsoft continues to dominate software markets with strong AI integration, leading to increased Microsoft 365 Copilot seats. Azure boasts a robust presence in cloud computing, despite concerns about AI spending. Financial results were positive, with revenue up 17% in the December quarter. Analysts forecast a 15% annual earnings growth through 2027, supporting the undervaluation and 52% upside potential.

Cloudflare offers application, network, and security services, benefiting from the rise of AI agents. The company’s fourth-quarter results were solid, with paying customers up 39% and net revenue retention at 120%. Despite trading 31% below its peak, Cloudflare is expected to see a 45% annual revenue increase through 2027, with a 40% upside implied by the median target price.

Considerations before buying Microsoft stock include insights from the Motley Fool Stock Advisor team, who have identified 10 top stocks for investors. While Microsoft wasn’t on the list, the historical performance of recommended stocks highlights the potential for significant returns. Stock Advisor boasts a total average return of 904%, far surpassing the S&P 500’s performance.

Read more at Nasdaq: Software Bear Market: 2 AI Stocks With 40% and 52% Upside to Buy Now, According to Wall Street