Investors are sending mixed messages about AI and software stocks.
The stock market is going through turbulence driven by two conflicting ideas about the AI trade. On the one hand, investors seem worried that big AI companies like Amazon (AMZN 2.21%) and Microsoft (MSFT 0.64%) are spending too much money on AI data centers and other AI-related capital expenditures (capex).
Amazon’s stock recently dropped after the company announced plans to spend $200 billion on AI-related capex in 2026. The stock is down about 9% year to date as I write this and 12% in the past year. Microsoft stock is also getting hit by AI doubts. On Jan. 28, the company reported strong quarterly earnings with a 17% year-over-year increase in revenue and a 21% year-over-year increase in operating income.
But the stock went down the next day, driven by concerns about the company’s plans to spend more than $100 billion on capex this year. Microsoft stock is down 17% year to date, and about 3.5% in the past year.
AMZN data by YCharts
Meanwhile, software-as-a-service (SaaS) stocks like Salesforce (CRM +0.20%) and Adobe (ADBE +2.08%) are also getting hit hard. Software companies have seen big declines in share price year to date because investors are worried that new advances in AI will severely disrupt the enterprise software industry, and some investors are calling this sell-off the “SaaSpocalypse.”
Image source: Getty Images.
What are investors thinking?
This “SaaSpocalypse” trade is based on the idea that agentic AI tools will become increasingly capable, to the point that companies won’t need to buy as much software as they used to. This would make once-hot software stocks much less profitable.
It seems unlikely that both ideas will be proven correct. Is AI so all-powerful that it’s going to wipe out software — one of the world’s most profitable industries? Or is AI overrated, to the point that AI stocks of the companies building its digital infrastructure are severely overvalued?
Industry insiders like Nvidia CEO Jensen Huang have recently spoken out against the SaaSpocalypse; Huang called the reasoning behind it”illogical.” If you agree with this point of view, it seems unlikely that all software is going to be replaced by AI anytime soon. SaaS companies have built software to add value with specialized expertise for industry-specific needs. General-purpose AI agents might not be able to replicate this.
Instead, AI companies might be more likely to partner with software companies and use AI models to make software better. If you believe that the software stock sell-off is overblown, you can buy the dip by investing in the iShares Extended Tech-Software ETF (IGV 2.73%).
How to buy the dip in software stocks
The iShares Extended Tech-Software ETF is an exchange-traded fund that gives you exposure to 114 North American software stocks. The fund’s top five holdings are prominent technology stocks Microsoft (9.7% of the fund), Palantir (8.2%), Salesforce (7.7%), Oracle (7.2%), and Intuit (5.2%).
The fund has delivered average annual returns of 10.4% per year since its inception in 2001, and charges an expense ratio of 0.39%. It’s trading at a price-to-earnings ratio of 35.2, which is slightly higher than the tech-heavy Nasdaq-100 index’s P/E ratio of 32.4.
Although this fund’s P/E ratio doesn’t look cheap compared to the Nasdaq-100, it could be a good way to take a concentrated position specifically in software stocks — and against the “SaaSpocalypse.”
Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Amazon, Intuit, Microsoft, Nvidia, Oracle, Palantir Technologies, and Salesforce. The Motley Fool recommends the following options: long January 2028 $330 calls on Adobe and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.
