Software stocks are up nearly 40% since 'SaaSpocalypse' bottom. Ways to play the sector
The software sector has recouped nearly all of its stock market value after artificial intelligence sent it into a tailspin, termed the "SaaSpocalypse," earlier this year The IGV software ETF is up nearly 40% from its April lows, when it had fallen nearly an equal amount from its highs in the third quarter of 2025.
It's a similar story for State Street's XSW software ETF , which climbed to a new high at the end of August after tumbling earlier this year.
IGV YTD mountain IShares Expanded Tech-Software Sector ETF in 2026 The redemption story for software is both a sign of its somewhat tenuous reconciliation with artificial intelligence, the technology that threatened to replace it, and a confirmation of software's distinct set of capital assets, analysts say.
"Frontier labs are more likely to partner with leading vendors than own the full stack, while systems of record, proprietary data and sticky workflows remain durable moats," Brent Thill at Jefferies wrote in a Wednesday note to clients, referring to layers of technology.
Ways to play the sector AI monetization is slower and patchier at the level of consumer-facing applications relative to deeper levels of the stack, such as the database and the operating system. As a result, software sub-sectors like data platforms and cybersecurity are a better bet at this stage than apps, where monetization is more unpredictable, according to Jefferies.
The investment bank likes companies such as data manager Snowflake , analytics platforms Dynatrace and cybersecurity companies Palo Alto Networks and Okta . "We believe the leading data analytics vendors, Databricks and SNOW, are best positioned to help organizations make sense of their business data and apply AI to run analytical workflows faster and more efficiently," Thill wrote.
Databricks is privately-held. Shares of Snowflake soared 22% Wednesday after second-quarter earnings topped Wall Street analyst estimates. Snowflake posted adjusted earnings of 62 cents per share on revenue of $1.55 billion, while analysts surveyed by LSEG had expected EPS of 45 cents and $1.48 billion in revenue. Snowflake also raised its full-year product revenue guidance.
Palo Alto Networks beat fiscal fourth-quarter estimates this week too. Earnings per share came in at an adjusted $1.02 versus an expected 98 cents, with revenue of $3.41 billion topping the $3.35 billion that was estimated, according to LSEG.
Success stories Despite caution at the application level, the uneven adoption and as-yet inconsistent monetization of AI is resulting in some crazy success stories that investors should prepare for. Earlier this month, shares of medical records platform Doximity more than doubled in overnight trading after the CEO made striking comments about the return on investment of its AI search tool.
"I can tell you we're earning more than 10 times per search in revenue than it costs," CEO Jeffrey Tangney said during the company's fiscal first-quarter earnings call. Meanwhile, older software companies have been keen to exhibit their compatibility with AI algorithms even as the new kid on the block threatens their turf.
Appearing on CNBC at the end of August, Salesforce CEO Marc Benioff and Anthropic CEO Dario Amodei emphasized that their businesses are complementary. "We're not interested in destroying anyone," Amodei said. "We think of this as a very positive sum thing, right?
That's the way markets work."