The recent sell-off in software stocks, dubbed “SaaS-pocalypse” by some, has sparked debate on Wall Street. Fears that advancements in artificial intelligence will disrupt the software-as-a-service (SaaS) industry triggered a wave of selling, but JPMorgan analysts argue the market reaction has been overblown, presenting a buying opportunity for investors.
The S&P 500 software index has fallen more than 17% year-to-date, fueled by concerns that AI tools could supplant traditional software solutions. Companies like Salesforce and ServiceNow have experienced significant declines, with their stock prices dropping 26% and over 26% respectively since the start of the year. This has shrunk the software sector’s representation within the S&P 500, falling from 12% to 8.4% in a short period.
However, JPMorgan’s research suggests the market is applying “broken logic” to the situation. The firm believes AI is more likely to reshape the software landscape than to destroy it entirely. While some software applications focused on simple functions may face disruption, companies with strong platform ecosystems, robust infrastructure, and valuable data assets are positioned to benefit from the rise of AI. The analysts highlight that these companies are likely to see increased productivity rather than obsolescence.
JPMorgan has identified 19 “AI-Resilient” stocks that could weather the current storm. A significant portion of these picks are in the cybersecurity space, including Palo Alto Networks and CrowdStrike. The rationale is that as AI-powered cyberattacks become more sophisticated, the demand for advanced security solutions will only increase. These companies possess the data and AI-driven threat detection capabilities needed to stay ahead of evolving threats.
Beyond cybersecurity, JPMorgan also recommends companies with strong data platforms, such as Snowflake, and those specializing in industry-specific software, like VibaSystems. The firm argues that AI’s reliance on vast datasets will increase the strategic value of companies that control and manage this data infrastructure.
Microsoft and CrowdStrike are specifically highlighted as key picks. JPMorgan believes Microsoft’s integrated ecosystem – encompassing Windows, Office 365, and its Azure cloud platform – provides a strong foundation for AI integration and monetization. The company is already leveraging AI through its Copilot feature, embedding it directly into its widely used productivity tools. Azure also positions Microsoft to capitalize on the growing demand for AI computing power.
CrowdStrike, a leader in endpoint protection, is seen as benefiting from the increased sophistication of cyberattacks driven by AI. The company’s data-driven AI threat detection capabilities and subscription-based model provide a solid foundation for continued growth. The firm notes that CrowdStrike’s fundamental strength remains intact despite the recent stock price adjustment.
The analysts anticipate that upcoming earnings reports and investor days will provide opportunities for company management to address concerns and demonstrate the potential of AI to enhance their businesses. JPMorgan suggests these events could serve as catalysts for a market correction and a rebound in software stock prices.
Recent market activity lends some support to this view. Design software company Figma, for example, reported year-over-year revenue growth of over 40% and saw its stock price jump more than 15% in after-hours trading. Figma’s CEO, Dylan Field, stated that “software is not going away,” and that while competition will intensify with the emergence of AI, overall demand for software will likely increase.
The current market downturn, according to JPMorgan, represents a chance to acquire high-quality software stocks at discounted valuations. The firm believes the worst-case scenarios for AI disruption in the software sector are unlikely and that the long-term outlook for the broader tech space remains positive. The analysts point to strong fundamentals, tumbling valuations – reaching levels not seen since last year – and supportive earnings as reasons for optimism.
While the “SaaS-pocalypse” narrative has captured headlines, JPMorgan’s analysis suggests a more nuanced reality. The firm’s recommendations emphasize a focus on companies that are well-positioned to adapt to and benefit from the AI revolution, rather than those that are likely to be displaced by it.
