2 Software Stocks to Buy That Are Down More Than 35% From Their Records

ServiceNow's Q2 2026 subscription revenue grew 24.5% year over year, though Armis contributed about 1.25 percentage points and U.S. federal customers pulled some revenue forward; management expects 20.5% growth in Q3. Adobe's fiscal Q3 subscription revenue rose 14%, AI-first product ARR increased more than 150%, and adjusted EPS grew 15% to $6.13, while total ARR growth and operating margin showed signs of slowing. The article argues valuation and AI concerns have weighed on both stocks and considers their current prices potentially attractive, while recommending gradual purchases and noting execution risks.

Analysis

The software sell-off creates different underwriting questions for NOW and ADBE. For NOW, the key risk is not simply AI replacing seats: enterprise workflow automation could increase usage, but customers may demand pricing tied to outcomes rather than licenses, shifting revenue capture and pressuring renewals. The near-term growth signal is also less clean than the headline rate suggests: acquisition contribution and federal deal timing make forward RPO conversion more informative than reported subscription growth. Any further multiple compression could persist even if execution remains solid.

ADBE’s low valuation offers more asymmetric upside if AI features reinforce Creative Cloud retention and expand spend per customer. But rapid growth in AI-first products is not yet proof of material incremental revenue or protection against lower-priced design tools. Margin erosion alongside slower total ARR growth is a meaningful warning: higher AI compute costs or discounting could absorb monetization gains. Bundled tools from large platform vendors are a second-order competitive threat to both firms; workflow automation may also reduce demand for some implementation work, affecting the ecosystem that helps deploy enterprise software.

Over days, sentiment and positioning can dominate fundamentals. Over 1–3 months, track NOW current RPO growth and deal conversion, and ADBE ARR growth, net retention/seat trends, and operating margin. Over 6–18 months, the decisive question is whether AI expands customer spend or merely substitutes for existing seats. Contrarian case: investors may be overpricing displacement before these metrics show it; equally, strong product adoption can coexist with weak economics if AI usage is expensive or cannibalizes legacy pricing.

Key Decisions for Investors

• Consider staged ADBE exposure rather than a full-size entry: the valuation provides a cushion only if ARR deceleration stabilizes and AI adoption converts into paid expansion. Add only after the next report confirms ARR trajectory and margin direction; stand aside if ARR growth slips toward single digits while margins continue contracting.
• Treat NOW as a quality compounder with execution risk, not a clean AI beneficiary. Prefer adding on weakness only if current RPO growth and deal conversion remain consistent with management’s outlook; reduce the thesis if RPO growth falls materially below that path or delayed deals become cancellations.
• Avoid an aggressive NOW-versus-ADBE pair trade for now: NOW has stronger growth visibility but less valuation protection, while ADBE is cheaper but faces greater direct product substitution risk. Revisit relative positioning after another quarter of comparable demand and margin evidence.
• Near-term catalyst watch: distinguish organic demand from acquisition contribution and timing shifts at NOW; for ADBE, seek evidence that AI-first product adoption increases total customer spend rather than displacing existing subscriptions. These are verification items, not conclusions established by management claims alone.