MW Software stocks have sold off on 'DOGE' fears and more. Is it time to get back into the sector?

By Emily Bary

A federal push for efficiency isn't necessarily a bad thing for software companies. Bernstein analysts see opportunity - but not for every player.

A number of prominent software stocks have sold off this year - reflecting fears about government cutbacks and a potential recession, as well as artificial-intelligence benefits that haven't manifested as quickly as some investors would have liked.

Shares of ServiceNow Inc. (NOW) are down 21% over the course of 2025 to date, while shares of Salesforce Inc. $(CRM)$ have lost 16% and shares of Adobe Inc. $(ADBE)$ have fallen 11%. The iShares Expanded Tech Software ETF IGV is off 6%.

But is it now time to wade back into the sector? Analysts at Bernstein say many software companies could end up benefiting from efficiency drives - though they don't love all names equally, and suggest that investors think critically about the big players.

For instance, ServiceNow gets perhaps 8% or 9% of its revenue from U.S. federal customers, making the software company one of the most exposed to layoffs spurred by the so-called Department of Governmental Efficiency. But that may be more of a short-term problem, according to the Bernstein team.

Many software companies sell their products through seat licenses, meaning that customers pay based on the number of employees who will be using the software. If federal agencies try to make do with fewer workers, the fear is that they'll need fewer seat licenses.

But the Bernstein analysts wonder if, once the dust settles, companies will lean into productivity software as they try to deal with the fact that they have fewer employees than before. ServiceNow stands to benefit in that sort of landscape, the analysts noted, and its shares are now trading at what they called "a rare 'discount.'"

"Long term we continue to think this is the 'next Microsoft,'" they wrote in a note to clients. "If you can deal with short-term volatility we encourage owning it now (picking the bottom might be hard)."

Read: ServiceNow's stock falls as the outlook underwhelms. But it is conservative?

The Bernstein team likes Adobe as well, though they acknowledge it's tough to see when sentiment around the company could turn more positive.

"Investors are skittish due to concerns about small and large competitors and the company has created confusion by changing the reporting structure without giving lots of historical data to help investors understand what is happening," they wrote.

If Adobe meets or beats expectations for AI annual recurring revenue, that could help the stock. "Stable" revenue growth would be a positive as well. "But it could take a bit of time for this to prove out," the Bernstein team wrote.

Don't miss: Adobe's CFO just made a rare purchase of stock. It sends an upbeat signal.

The analysts also saw promise in cybersecurity plays like Palo Alto Networks Inc. (PANW) and Zscaler Inc. (ZS) "Cybersecurity, while often seat-based, has a more limited federal exposure," they wrote. Plus, Palo Alto Networks has been up against tough comparisons recently, but those should get easier. And Zscaler stands to benefit from changes made to its sales strategy.

Palo Alto Networks' stock is up slightly on the year but down marginally on a three-month basis. Zsclaer has been a better performer, with its stock up 17% so far this year.

Bernstein is more caution on Salesforce's stock, which it rates at underperform. "Investor sentiment, and the stock price, have been buoyed by Agentforce expectations but agentic AI is still early days and even if the product is massively successful it could be years before it is a big enough driver of growth," the analysts wrote. Meanwhile, organic revenue growth for Salesforce's overall business is slowing down, they added.

See more: 7 software stocks that could benefit as AI gets cheaper to run

-Emily Bary

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

(END) Dow Jones Newswires

March 26, 2025 17:24 ET (21:24 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.