Hello, Reader.
Software stocks didn’t feel much love approaching Valentine’s Day – and no amount of flowers and chocolate today can change that.
We saw this in headline after headline…
Last week, Barron’s ran a piece titled “Palantir Stock Drops 14% as AI and Software Pull Back. It’s Having a Terrible 2026.”
On Tuesday, CNBC published “Monday.com drops 21% as AI disruption fears mount in software.”
Then on Wednesday, Yahoo News put out “Unity Software shares drop sharply on weak first quarter guidance.”
Many popular software names suffered as investors panicked about their current vulnerable position amid advances in artificial intelligence. On the other hand, many analysts view the selloff as overblown.
Regardless, the recent volatility in the software sector is, ultimately, a natural consequence of investing in the frenzied AI market.
That’s why it’s important to stay as alert as possible.
So, in today’s Smart Money, let’s go over why software stocks are still suffering steep declines. Then, I’ll share how you can keep your portfolio safe from the selloff.
Let’s dive in…
Software’s Sweetheart Status Is Over
Software-as-a-service (SaaS) companies were very profitable investments until recently, thanks to their breakthrough technology and powerful growth profiles. But as AI arrived and rapidly advanced, many SaaS companies have seen their valuations deteriorate.
Here’s why…
SaaS companies thrived because they built highly scalable, recurring revenue models. Once the software was developed, it could be distributed to thousands — or millions — of customers at minimal incremental cost.
By shifting businesses from one-time license purchases to subscription-based access, SaaS providers generated predictable cash flow, high margins, and strong operating leverage — a formula Wall Street rewarded generously. Now, however, the economics are changing.
With the advancement of Agentic AI – particularly Anthropic’s Claude Cowork, which can autonomously perform complex software tasks – the market is beginning to question how much of that subscription layer is truly indispensable.
If AI can increasingly perform those tasks directly, the value proposition of many traditional SaaS platforms comes under pressure.
The sector’s unpopularity becomes even more apparent when you look at some companies’ valuations.
Take Palantir Technologies Inc. (PLTR), for example. Even after suffering a shellacking that has “disappeared” 35% of its market value since Halloween, its stock is still trading for a lofty 100 times estimated 2026 earnings.
That rich valuation leaves no room for bad news, nor even mild doubts.
To put it simply, it’s becoming increasingly challenging for software firms to keep up with the AI advancements that may replace them.
But all hope is not lost. Instead of trying to “catch the falling knife” that Saas stocks have become, pivot your attention, and some of your capital toward the broad group of stocks I call “AI Appliers,” which Tom Yeung discussed in detail in Thursday’s Smart Money.
Two examples include Zimmer Biomet Holdings Inc. (ZBH) and Match Group Inc. (MTCH).
Two AI Appliers – and Where to Find More
Zimmer Biomet applies AI in a place where it matters a great deal: the operating room. The company integrates machine learning into surgical planning, robotic-assisted joint replacement, imaging analysis, and post-operative outcome tracking. Surgeons use Zimmer’s software to map anatomy, select implants, and guide procedures with greater precision.
This doesn’t replace Zimmer’s core hardware business, it upgrades it. AI makes surgeries faster, more accurate, and more reproducible. That leads to better patient outcomes, shorter hospital stays, and stronger surgeon loyalty. Over time, it also builds a proprietary data moat: every procedure feeds the system, improving future recommendations.
From an investment perspective, this is textbook “AI applied to physical systems.” Zimmer sells implants, but AI increases utilization, strengthens switching costs, and supports premium pricing. Hospitals don’t just buy devices anymore — they buy integrated surgical ecosystems.
Match Group is a very different type of AI appliers, but it may be the purest consumer-facing AI appliers in the entire stock market. Across all its dating platforms, its AI determines who meets whom, how profiles appear, which conversations get started, and how safety risks are flagged.
These algorithms directly drive revenue. Better matches increase engagement. Higher-quality profiles improve retention. Smarter moderation reduces abuse and churn. Every improvement shows up in paid subscriptions and user lifetime value.
Match also uses AI to personalize prompts, recommend photos, and coach conversations — effectively acting as a “digital wingman.” This turns abstract machine learning into tangible emotional outcomes: more connections, more dates, more relationships.
Unlike social media, Match monetizes success. If AI creates better experiences, users pay more and stay longer. That’s unusually clean feedback between model quality and financial results.
In addition to these two names, I’ve stocked my Fry’s Investment Report portfolio with several AI Applier companies and other strong AI plays to help grow and protect your wealth during AI’s constant disruption.
In fact, I recommended a brand-new AI Applier play to my Fry’s Investment Report subscribers just yesterday. It is a health-technology platform company that sits squarely in the sweet spot of the AI revolution. It’s an AI Applier hiding in plain sight.
Click here to learn more.
Regards,
Eric Fry
