Software Bear Market: 2 AI Stocks With 50% and 83% Upside to Buy Now, According to Wall Street

The S&P North American Technology Software Index is down roughly 30% from its September peak amid investor concerns that AI will displace existing software demand, a selloff accelerated by Anthropic's Cowork launch; Nvidia's CEO called the market reaction "illogical." Microsoft reported paid Microsoft 365 Copilot seats rose 160% in the December quarter, Azure captured 21% of cloud infrastructure spend (up from 20%), and Wall Street models adjusted EPS growth of ~15% annually through FY June 2027; the stock trades at ~$401 with a $600 median target (≈50% upside) and a 26x forward multiple. ServiceNow reported Q4 revenue of $3.5bn (+20%), non-GAAP operating margin of 31% (up 1.5pp) and non-GAAP EPS of $0.92 (+26%); analysts expect ~18% next-year adjusted earnings growth and ~19% CAGR through 2027, with the $101 share price and $185 median target implying ≈83% upside at a ~29x multiple.

Analysis

Market structure: The AI-driven re-pricing has concentrated wins in cloud infrastructure and AI compute (NVDA, MSFT, select hyperscalers) and workflow/IT automation leaders (NOW). The S&P North American Technology Software Index is ~30% off its peak since Sept, signaling a rotation from broad software exposure to platform/compute winners; Azure’s share gain to ~21% and NVDA’s pricing power on GPUs imply higher revenue-per-customer for those providers while small-cap SaaS faces churn and product cannibalization risk.

Risk assessment: Key tail risks are regulatory (EU AI Act, US antitrust/consumer-protection) over the next 6–18 months, supply shocks in high-end GPUs or OpenAI-Azure access changes, and revenue cannibalization causing 10–25% EPS downside for vulnerable point-solution SaaS. In the immediate term (days–weeks) expect elevated volatility and flows; medium term (3–12 months) outcomes hinge on enterprise deployments (Anthropic, OpenAI) and GPU supply; long term (12–36 months) leaders with hybrid/cloud advantages should compound above-market if adoption continues.

Trade implications: Favor concentrated longs in MSFT and NOW for 12–24 month horizons (leaders with hybrid/cloud/agent capabilities) and hedge cyclic/dispersion risk by shorting software-beta via IGV or put spreads. Use options to skew exposure (buy 9–18 month LEAP calls on idiosyncratic winners; buy 3–9 month put spreads on software ETFs to monetize downside volatility). Rebalance on catalyst windows: MSFT/ NOW earnings, Anthropic enterprise rollouts, and major GPU supply announcements.

Contrarian angles: Consensus underestimates TAM expansion from AI-enabled automation — leaders may see ARR expansion, not contraction, as customers consolidate vendors to capture agentic workflows. The sell-off is likely overdone for high-quality platform names (MSFT, NOW) but remains justified for undifferentiated SaaS; historical parallel: post-bust consolidations created durable oligopolies, favoring selective long positions and M&A-arbitrage opportunities for acquirers.

Key Decisions for Investors

• Establish a 3–5% portfolio long position in MSFT (ticker MSFT) over the next 4–8 weeks (dollar-cost average), target ~50% upside to $600 over 12–24 months; hedge initial entry with a 9–12 month put at ~18% OTM or limit loss to 15–18% of the position if Azure/OpenAI exclusivity or Copilot adoption stalls.
• Establish a 2–3% long position in ServiceNow (NOW) targeting $185 (~80% upside) over 12–24 months; alternatively buy Jan 2027 LEAP calls (approx. 12-month tenor) sized to equal a 2–3% delta-adjusted exposure and add on any >15% pullback.
• Implement a relative-value hedge: size 1:1 long NOW vs short iShares Expanded Tech-Software ETF (IGV) representing 2% net notional to isolate NOW idiosyncratic upside while shorting broad software beta; reduce short if IGV falls >20% or NOW underperforms by >25%.
• Buy downside protection on software beta: purchase 3–9 month put spreads on IGV (e.g., 20–30% OTM spreads) sized to cover 50–75% of software exposure, funded by selling 4–6 week covered calls on up to 25% of MSFT holdings if assigned yields are acceptable.
• Monitor and act on catalysts in defined windows: if EU AI Act or major FTC action becomes likely within 30–90 days, reduce net MSFT/NOW exposure by 25–50%; if Anthropic/Microsoft enterprise rollouts report >30% adoption uplift in Q/Q metrics over two quarters, add 50% to MSFT/NOW positions within one week.