Major software stocks have experienced a significant valuation compression in 2025, with shares of ServiceNow (NOW), Salesforce (CRM), Workday (WDAY), and Adobe (ADBE) declining between 35% and over 40% year-to-date. The sell-off stems from persistent concerns that generative AI tools from companies like OpenAI and Anthropic could erode the long-term revenue growth of traditional software providers. However, the sharp drop in valuations has led some investors to question whether these stocks are now undervalued relative to their fundamentals.
Valuation Reset Across the Sector
The forward price-to-earnings (P/E) ratios for these four companies have fallen dramatically below both their historical averages and the broader market. The S&P 500 currently trades at a forward P/E of 23. In contrast, Workday’s forward P/E has dropped to 11, well below the sector median of 24 and its five-year average of 40. ServiceNow now trades at 24 times forward earnings, down from a five-year average of 61. Adobe’s forward P/E stands at 8.3 versus a historical average of 27, while Salesforce’s multiple has contracted to 11 from 31. This compression is not limited to these four; other SaaS companies such as Intuit, AppLovin, Trade Desk, and Oracle have also seen similar declines.
Revenue Growth Remains Resilient
Despite the so-called “SaaSPocalypse” narrative—the fear that AI will render many software products obsolete—recent earnings reports show that these companies continue to grow. ServiceNow reported a 22% revenue increase in the first quarter to $3.7 billion, with subscription revenue rising at a similar pace. Management raised its forward guidance, and analysts project annual revenue growth of 22% this year and 19% next year. Workday’s revenue is expected to grow 11% in 2025 and 10% in 2026. Salesforce’s growth is forecast at similar levels, though its figures include contributions from acquisitions such as Informatica and Fin. Adobe, despite being heavily exposed to AI disruption, is expected to see revenue rise 11.5% this year and 9% next year. While these growth rates are lower than historical peaks, they remain robust for mature companies.
Potential Catalysts for a Rebound
Several factors could drive a recovery in SaaS stocks. First, the valuation reset has made these names attractive to bargain hunters. Second, a rotation from high-flying memory stocks—such as Sandisk, Micron, Seagate, and Western Digital—into software is a recurring market pattern that may unfold again. Third, many software firms are successfully integrating AI into their own products. Salesforce’s Agentforce, for example, is already used by thousands of companies, demonstrating that AI can complement rather than replace existing offerings. Additionally, software companies can leverage AI to streamline operations and reduce labor costs, potentially boosting margins.
As the market digests these dynamics, the current sell-off in NOW, WDAY, ADBE, and CRM may present a buy-the-dip opportunity for investors with a longer time horizon. For more on shifting market trends, see our analysis of Magnificent 7 stocks hitting decade-low valuation premiums and under-the-radar stocks analysts favor for summer 2026.
This article is for informational purposes only and does not constitute financial advice.
