Software stocks have lagged AI names in 2025, with many posting significant losses. Morningstar analysts believe software stocks are undervalued, including ServiceNow. Concerns about AI disrupting the industry, changing interest rate forecasts, and pandemic-related slowdowns have led to a brutal selloff. However, software firms have strong fundamentals and are attractive buys, with Adobe and Salesforce trading at discounts.

The Morningstar Global AI & Big Data Consensus Index is up 26.6%, while the Morningstar Software Index has gained just 2.6%. Microsoft is the exception, benefiting from AI investments. Concerns about AI’s impact on software-as-a-service pricing models and revenue streams persist, with software companies generating minimal revenue from AI. Broader macroeconomic forces and a post-pandemic slowdown in software revenues are also contributing to the software stock selloff.

Despite fears, software firms have shown strong earnings and guidance. Adobe exceeded expectations but saw its stock plummet. Valuations for software stocks have decreased, with many trading at discounts. Some stocks, like Adobe and HubSpot, are deeply undervalued. Morningstar analyst Romanoff believes software stocks are attractive buys, particularly ServiceNow and Microsoft.

Romanoff sees software as very attractive due to sticky revenues and high free cash flow margins. ServiceNow and Microsoft are highlighted as good buys, with ServiceNow having high revenue growth and economic moat. Microsoft is well-positioned to benefit from AI in the long term. Overall, software stocks are undervalued, presenting opportunities for investors.

Read more at Morningstar: For Software Stocks, It’s Been an AI Bust, Not a Boom