Software stocks have dropped enough. It's time to buy.

The iShares Expanded Tech-Software Sector exchange-traded fund is down 21% from its $110 record close in December to just under $88.

The sector had outperformed the S&P 500 for several years leading up to that high, but once the market became concerned about the economy, fund managers took profits. President Donald Trump's tariffs, which are expected to slow economic growth, could cause companies to reduce their technology budgets in the face of uncertain demand and profits.

Already, chief information officers surveyed by Morgan Stanley software analyst Keith Weiss have indicated they expect to grow their budgets by just over 3% this year on average, down from an expectation of just over 4% before Trump's tariff announcements. That could mildly dent sales for software providers, and it has already led analysts to reduce their 2025 earnings estimates for software companies, partly explaining the stocks' weakness.

Now, the price of the ETF is down to a key level for buyers. The roughly $80 to $88 range is where buyers have repeatedly rushed in to support the price since July. Even through all of this year's market volatility, the price remains on the larger uptrend it has been on since early 2020. That suggests that, as long as the ETF stays above the $80 area, it will keep rising over the long term.

The stocks look like a bargain, particularly given that growth should be reliable overall. In aggregate, Weiss' software universe is trading at an average free cash flow multiple below 28 times -- well below a long-term historical average in the high 30s. Assuming the multiples don't move much lower, and free cash flow grows, the stocks will gain.

In the long run, software sales will keep growing, because their customers are still early in the process of adopting artificial intelligence and cloud-based services to reduce costs and become more efficient. In the near term, customers may invest a little less than previously expected, but they'll still increase their investments Any budget tightening this year should be mild, especially because companies know that buying AI-driven software will ultimately help them reduce overall operating costs, since AI can do more -- and faster -- than people.

"Software likely proves the solution, not the problem -- in a slower growth world with increasing uncertainty, software solutions enabling improving productivity and a better ability to manage the increased complexity of our environments," Weiss writes.

That's why investors can have confidence in current growth estimates. Analysts expect companies in the software ETF to produce sales, in aggregate, that will grow 11% annually over the coming three years, higher than the expected growth for the average S&P 500 company. Since many of these companies are large and mature, they don't require much additional spending to achieve that growth. As a result, analysts expect profit margins to rise, leading to 17% annual growth of free cash flow per share -- and that's even with software firms' expected massive increase in capital expenditures to build out their data centers.

Prime examples we identified -- companies that are expected to see sales growth above that of the average S&P 500 company, increase free cash flow by double digits in percent, and that trade at multiples below their 10-year averages -- include Salesforce and ServiceNow.

Another is Microsoft. Yes, its AI product Azure may see slightly reduced demand, but it's still one of the company's fastest-growing products. Im fact, analysts forecast almost 32% year-over-year growth this year.

In addition, Microsoft was the most popular answer among technology chiefs for which software vendor they're likely to increase their spending on, according to Weiss's survey data. Azure growth will help overall sales for Microsoft grow 14% annually to $387 billion by 2027, according to FactSet.

That can spark annual free cash flow to grow 20% to $28.16 a share by 2027. Part of that picture: analyst expect capital expenditure growth to moderate, while management repurchases stock, which reduces the share count.

This should bring Microsoft shares higher. At the stock's current price of $377, it's trading at less than 14 times the 2027 cash-flow-per-share estimate. Unless the company's long-term growth dramatically slows down by the end of 2026 -- highly unlikely -- the stock will trade at a much heftier forward multiple than that.

Cash flow growth will take the stock higher -- and that's true for several software names.