By Angela Palumbo

Now is a good time for investors to buy up shares of software companies, Evercore ISI says.

Stocks are broadly under pressure amid economic uncertainty and concerns about the impact of President Donald Trump's tariffs. In particular, investors have sold highly valued tech stocks that performed well last year, sending the Nasdaq Composite index down 6% so far this year .

Software stocks have not been immune to Wall Street's anxiety. The iShares Expanded Tech Sector exchange-traded fund has dropped 4.5% this year and 10% from its all-time closing high of $108.46 on Feb. 18, according to Dow Jones Market Data.

That means now might be the time to "lean in" to the recent decline in software shares, Evercore's Kirk Materne wrote in a research note this week. He highlighted his five top names in the space: Salesforce, Microsoft, Intuit, Snowflake, and Workday.

"We believe the risk/reward for many large-cap software names remains attractive," Materne wrote.

One reason for the optimism is cheaper entry points. All five of Materne's top picks are trading below their five-year average forward price-to-earnings ratios after recent stock declines. Microsoft, for one, is trading at 27.9 times earnings expected over the next 12 months, compared to its five-year average of 29.5 times. Salesforce is trading at 25.9 times, below its five-year average of 40.4 times forward earnings.

Another reason for Materne's bullish stance is the opportunity for these companies to monetize artificial intelligence. Some AI software initiatives include AI agents and customer service chat bots that are meant to reduce costs and improve productivity for enterprises. While these are relatively new endeavors, businesses have already shown they're willing to spend big on AI now for improvements later. That's good for software companies.

For example, Agentforce is from Salesforce gives companies the ability to build and deploy AI agents that can optimize marketing campaigns, resolve customer queries and more. Salesforce said in February that it had closed 5,000 Agentforce deals since October. Materne wrote that Agentforce could add $1 billion in incremental revenue by 2026.

"While it is super early days -- the monetization of Gen AI has begun and will build momentum over the remainder of the year," he wrote. "We believe the big are going to get bigger in a Gen AI world and we believe the AI narrative in software will only get stronger as the year progresses."

But concerns remain. For one, Salesforce, Microsoft, and Intuit all gave financial forecasts in their recent earnings reports that didn't meet expectations. Salesforce and Microsoft provided disappointing revenue outlooks for the year while Intuit's earnings guidance missed the mark.

Then there's general questions about what rising tariffs could mean for the near-term economic environment. For one, businesses affected by the tariffs might have to cut back on spending. Still, Materne is optimistic.

The software industry is relatively insulated against tariffs, as most of the lines of business offerings are longer-term subscription-based contracts, so near-term impacts would be limited, he writes. Also, the software being sold is meant to help companies run more efficiently, and that is something businesses are willing to invest in.

"We believe the setup for software remains favorable when taking a 3-6 month view," Materne said.

It's up to investors if they want to take the plunge now in this risky environment.

Write to Angela Palumbo at angela.palumbo@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 06, 2025 14:16 ET (19:16 GMT)

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