MW Software stocks have been crushed. Here's how to play the sector as the dust settles.
By Hannah Pedone
Analysts see opportunities in shares of cybersecurity, infrastructure and HR software companies
Investors can take a breather and assess whether there are opportunities to buy some beaten-down software stocks, after what some analysts believe was "indiscriminate" selling.
Software stocks have taken a beating, and now investors get a pause to assess the carnage and see whether some parts of the sector have been unfairly punished.
The Shares Expanded Tech-Software Sector ETF IGV snapped an eight-session losing streak on Friday, but it has still dropped 16.5% since the streak started. The declines over that time were widespread - affecting not just makers of products like specialty software for the legal field, which may be at risk of more imminent disruption from new artificial-intelligence tools, but also shares of cybersecurity and infrastructure plays that analysts think might be more insulated.
The pressure on software stocks intensified this week after Anthropic announced new legal and financial AI features that make performing financial analysis and legal tasks easier for its Claude chatbot. Additionally, OpenAI launched OpenAI Frontier, an enterprise platform to help companies use AI agents to perform actual tasks. These tools added to existing investor fears that AI will upend the business models of traditional software companies.
Yet some analysts say the selling was indiscriminate, based more on fear of the unknown than an actual and serious threat.
"I do believe this is kind of like a DeepSeek moment," Needham analyst Scott Berg told MarketWatch - referring to the time in early 2025 when the tech sector tumbled amid worries about cheap AI competition from China, which never really played out. "It's mainly because if we look at the software functionality that I think investors are worried about, most of that just hasn't come to fruition."
Whether the threat is real or not, Wall Street has decided that the once-lofty valuations within the software sector were in need of a reset, especially if it becomes harder for the companies to take on debt because of their reliance on aging subscription business models for steady streams of revenue.
Friday's stock-market bounce and the weekend break have provided investors the chance to assess whether the bearish narrative could last. Some, like John Belton, portfolio manager at Gabelli Funds, believes the worries about AI agents replacing software, especially for industry-specific functions, are overblown.
Belton wrote in a note that for software, it was never the code itself which was the "secret sauce" or "competitive advantage." Instead, "it was the ability to diagnose a workflow, create a solution, and build a go-to-market around all of that," he said. "AI promises to disintermediate the piece about writing the code, not the rest. But of course, the read-through from this to the stock market is case by case."
For investors looking to buy beaten-down plays, there are opportunities in subsectors, like infrastructure and cybersecurity companies, that analysts say are likely to survive disruption from AI.
Focus on infrastructure over applications
KeyBanc Capital Markets analyst Jackson Ader sees a better future for infrastructure software companies, which provide the back-end platforms that power software systems, than for application software companies, which offer the front-end software that users and businesses interact with.
"Infrastructure software is going to be harder to replicate and harder to custom build and custom code," Ader told MarketWatch.
He called out Microsoft $(MSFT)$, Oracle $(ORCL)$, SAP $(SAP)$, Salesforce (CRM), Adobe $(ADBE)$ and ServiceNow (NOW) as companies that could stay entrenched in corporate environments.
Melissa Otto, head of research at S&P Global Visible Alpha, noted that investors may be wondering if Microsoft "is an interesting opportunity or not" in light of how rapidly its multiple has contracted. With the stock diving 13.9% in two weeks to wipe out $481.3 billion in market capitalization, it now trades at 22.3-times forward earnings, according to FactSet data, versus its five-year average of 29.5.
Yet KeyBanc's Ader believes there are opportunities for Microsoft to have positive tailwinds from AI. He cautioned, however, that the company's valuation "isn't necessarily a catalyst," or enough of a reason for people to buy the stock, and noted that Microsoft has underperformed its megacap peers in 2025 and in 2026. "We've liked it for a little while, and we've been wrong for a while."
Rahul Chopra, an analyst at Berenberg, also looked to dispel the "AI eats software" narrative. He said data- and cloud-infrastructure software companies like Palantir Technologies (PLTR), Snowflake (SNOW), Cloudflare (NET), MongoDB $(MDB)$, and Datadog (DDOG) have been the "clear relative winners" for software, given these companies are more directly connected to AI workloads compared with more traditional application-layer companies.
He noted that the software-as-a-service companies that have performed the weakest in the past year are those at most risk from AI, which include names like Workday (WDAY), Atlassian $(TEAM)$, HubSpot (HUBS) and Monday.com $(MNDY)$.
You can't 'vibe code' cybersecurity
The Amplify Cybersecurity ETF HACK bounced 3.3% on Friday but still lost 2.5% this week, which struck some analysts as unwarranted given how technical cybersecurity products can be.
"I don't know why anyone would want to try to write their own security code. ... You need someone who is more knowledgeable in the subject matter to write that software for you," said Needham's Berg. "It would be pretty much the last bucket I think a company would ever try to write on their own."
Berenberg's Chopra also believes the worries that AI will disrupt cybersecurity companies are "unfounded" despite the fact that the subsector has been pulled into the broader selloff.
"AI is deeply embedded in the upsell momentum for cybersecurity vendors" he said. So the companies "naturally benefit" from AI monetization, especially given tailwinds for the subsector from rising geopolitical and supply-chain risks.
His top picks include Zscaler (ZS), Okta $(OKTA)$ and CrowdStrike (CRWD), as well as SailPoint $(SAIL)$, Rubrik $(RBRK)$, and SentinelOne (S).
The safety of HR and payroll software
Needham's Berg also notes that one pocket of software that has irrationally been swept up in the selloff this week is human-resources and payroll software. He says this pocket of the sector, which includes companies like Paylocity $(PCTY)$ and Paycom $(PAYC)$, is not likely to be easily replaced by AI due to its complexity and stakes.
"This thesis that companies are just going to vibe code their own software - it's indefensible until we actually see them do it."
He noted that the complexities for payroll software are too many to easily be replaced by AI.
"If some of these vendors, like Salesforce or Workday or ServiceNow, if they can infuse AI and the customers buy it, that'll change the narrative," Berg said. "I do believe we have a chance to see that in the back half of this year."
He added that it's "a bit ironic" that the software selloff has been triggered by product launches and demos from Anthropic, Google and OpenAI.
"Either AI is eating software, or returns on AI investments are insufficient - both cannot be true," Berg said.
-Hannah Pedone
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(END) Dow Jones Newswires
February 07, 2026 07:30 ET (12:30 GMT)
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