16 software stocks for investors sifting through the bargain bin

Baird analysts flag a set of discounted software stocks as the sector lags—while the S&P 500 is up ~16.5% YTD, the iShares Expanded Tech Software ETF has risen only ~4% amid AI disruption concerns and interest-rate uncertainty. Analysts highlight names across cloud, cybersecurity and vertical software: Axon (down ~10% in 2025 after nearly tripling in 2024) trades at ~71.7x forward P/E but with ~30%+ growth and ~25%+ margins; Zoom (~9x estimated 2027 FCF) and Twilio (~18x) are singled out for improving growth; Rubrik (≈6.8x EV/2027 sales) and Okta (≈3.7x) are noted as value plays in cybersecurity. Baird also recommends monitoring Klaviyo, monday.com, ServiceNow, Atlassian, Tyler, Autodesk, Q2 Holdings, Procore and Veeva where favorable fundamentals and valuation could produce upside.

Analysis

Market structure: AI anxieties + higher rates have compressed multiples across software, benefitting incumbent cybersecurity (PANW, ZS) and vertical SaaS (VEEV, ADSK, QTWO) that can monetize mission-critical workflows; losers are commoditizable horizontal SaaS (KVYO, MNDY) with thin differentiation. Pricing power shifts toward vendors with sticky ARR, high gross margins and clear AI monetization paths; expect share gains for names with <4x EV/2027 sales (OKTA) or strong FCF (ZM). Cross-asset: continued de-rating in software increases equity-bond convexity — weak software = lower risk appetite, steeper demand for IG credit — and boosts realized equity option implied vols by 20–40% on earnings beats/misses over the next 3 months.

Risk assessment: Tail risks include rapid AI commoditization that reduces ARPU by >10–20% for undifferentiated SaaS, regulatory actions on surveillance devices (AXON) or privacy fines (KVYO), and macro shocks from a 25–50bp surprise Fed hike. Immediate (days) risks are earnings-driven volatility; short-term (1–6 months) depends on Fed guidance and Q4 billings; long-term (12–36 months) hinges on enterprise AI adoption curves and M&A. Hidden dependencies: billings vs GAAP, customer concentration, and public-sector budget cycles (TYL) can mask real churn and cash flow timing.

Trade implications: Establish 2–3% long positions in OKTA and RBRK (target 30–50% upside in 12–18 months, stop-loss 20%) and a 1–1.5% position in ZM/TWLO for FCF recovery into 2026. Buy 9–15 month call spreads on OKTA and ZS (cap premium to 0.6% portfolio each) to leverage multiple expansion with defined risk. Short-select names (KVYO, MNDY) via 3–6 month put spreads sized 0.5–1% each; pair trade long OKTA vs short MNDY (net delta ~0).

Contrarian angles: Consensus underestimates incumbents’ ability to embed AI and widen moats — look for accelerating ARR/NRR as a buy signal rather than fearing AI cannibalization. The sell-off appears overdone for high-quality cyber names where EV/sales <7x historically precedes outperformance; conversely, small-cap horizontal SaaS with concentrated customers may be permanently impaired. Monitor 4 data points as triggers: ARR growth inflection >5ppt y/y, FCF margin >10% for ZM/TWLO, acquisition inquiries (rumor-driven volume spikes), and Fed terminal rate revisions ±25bp.

Key Decisions for Investors

• Establish a 2–3% long position in OKTA (ticker OKTA) targeting 30–50% upside over 12–18 months; use a 20% stop-loss and scale in on any >10% pullback.
• Initiate a 2% long in Rubrik (RBRK) sized for 12–24 month holding period given 6.8x EV/2027 sales; take profits at +40% or if EV/sales expands above 10x.
• Allocate 1–1.5% to a basket of Zoom (ZM) and Twilio (TWLO) for 2026 FCF recovery; prefer ZM if 2027 FCF multiple stays ≤10x. Use 9–12 month call spreads (cap premium ~0.5–0.7% portfolio) to limit downside.
• Short Klaviyo (KVYO) and Monday.com (MNDY) via 3–6 month put spreads (0.5–1% per name) as AI commoditization and weaker ARPU present 30–50% downside potential; pair long OKTA vs short MNDY (equal notional) to neutralize macro risk.
• Rebalance sector exposure: trim broad software ETFs by 3–5% and reallocate into cybersecurity and vertical SaaS (add PANW, ZS, VEEV) over the next 4–8 weeks ahead of Q4 earnings and potential Fed rate clarity.