Why the Software Sell‑off Could Be Your Next AI‑Proof Investment Opportunity
- Broad software rally stalls, but infrastructure and cyber firms remain resilient.
- AI‑driven fear may have punished solid subscription businesses without merit.
- Microsoft, Palantir, Zscaler and Paycom emerge as potential long‑term winners.
- Valuation gaps create entry points; forward‑PE ratios for peers now look attractive.
You saw the headlines about AI‑powered chatbots, but the panic‑selling of software stocks missed the deeper story.
Software Sector Shock: What Really Triggered the Drop?
The tech‑focused IGV ETF erased more than 16% of its value over eight sessions, a decline that spanned everything from legal‑tech to cloud‑native platforms. The catalyst? A string of high‑profile AI demos – Anthropic’s Claude adding legal‑analysis features and OpenAI unveiling the Frontier enterprise platform. Investors rushed to conclude that AI agents would render traditional software obsolete.
Yet analysts argue the sell‑off was “indiscriminate.” They point to a classic over‑reaction pattern: the market fears a technology disruption before the disruption materialises. A 2025 episode known as the “DeepSeek moment” saw a similar panic over cheap Chinese AI, which never materialised into lasting damage. The same logic applies today – the software code itself is not the moat; the real advantage lies in workflow integration, customer relationships, and go‑to‑market expertise.
Why Infrastructure Software Is Likely to Outperform
Infrastructure providers build the back‑end engines that power every cloud workload. Because these platforms are deeply embedded in enterprise IT stacks, they are harder to replace with a quick‑code AI tweak. Analysts highlight Microsoft, Oracle, SAP, Salesforce, Adobe and ServiceNow as entrenched players that benefit from sticky contracts and multi‑year subscriptions.
Microsoft’s forward earnings multiple has compressed to roughly 22x, down from a five‑year average of 29.5x, after a 13.9% two‑week plunge that erased $481 billion in market cap. While the valuation dip is notable, it alone isn’t a buy‑signal; the stock has lagged other megacaps in 2025‑26. Still, the company’s AI‑driven cloud services could act as a tailwind, provided the pricing premium is justified.
Data‑and‑cloud infrastructure names such as Palantir, Snowflake, Cloudflare, MongoDB and Datadog have already shown relative strength. Their revenue models are closely tied to AI workloads – the more AI models customers train, the more compute and storage they consume, directly boosting these firms’ top lines.
Cybersecurity: The Unshakable Defensive Play
Security software is a classic defensive moat. The notion that a company could write its own security code in‑house is unrealistic – expertise, compliance and rapid threat evolution make outsourcing to specialists the norm. Consequently, the recent bounce in the Amplify HACK ETF (3.3% on Friday) underscores a market correction rather than genuine weakness.
Key picks include Zscaler, Okta, CrowdStrike, SailPoint, Rubrik and SentinelOne. These firms embed AI into detection and response, turning the technology into a revenue multiplier rather than a substitute. Rising geopolitical tensions and supply‑chain vulnerabilities further reinforce demand for robust cyber defenses.
HR & Payroll Software – Complexity Shields It From AI Disruption
Payroll and human‑resource platforms – think Paylocity and Paycom – operate in a regulatory‑heavy environment. The stakes of mis‑paying wages or mishandling employee data are too high for a rushed AI‑only solution. As a result, the sector remains insulated from the “code‑vibe” narrative.
Analysts warn that only if giants like Workday or Salesforce successfully embed AI into their suites will we see a material shift. Until then, the current valuation discounts present a compelling entry point for investors seeking steady cash‑flow businesses.
Historical Parallel: When Fear Overestimated Disruption
The 2022 cloud‑computing frenzy offers a useful analogy. Investors dumped legacy on‑prem software as AWS and Azure grew, yet many on‑prem vendors survived by pivoting to hybrid models. Similarly, today’s AI scare may push capital toward the “hybrid” of traditional SaaS and AI‑enhanced services, rewarding those that can blend both.
Investor Playbook: Bull vs. Bear Cases
Bull Case: AI integration boosts usage‑based revenue for infrastructure and cyber firms, while subscription churn remains low. Valuation gaps widen, delivering upside of 20‑30% on entry.
Bear Case: A faster‑than‑expected AI commoditisation erodes pricing power, especially for mid‑tier application vendors. Macro‑economic headwinds could pressure enterprise IT budgets, compressing multiples further.
In practice, a balanced portfolio should allocate:
- 30% to infrastructure leaders (Microsoft, Oracle, Snowflake)
- 30% to cybersecurity specialists (Zscaler, CrowdStrike, Okta)
- 20% to HR/payroll stalwarts (Paylocity, Paycom)
- 20% to opportunistic bets on AI‑infused application players (ServiceNow, Salesforce)
By focusing on the firms with defensible moats and clear AI tailwinds, investors can turn today’s panic into tomorrow’s profit.