By Hannah Pedone
Software stocks have bounced off their lows, and a D.A. Davidson analyst recommends focusing on those with compelling growth rates
D.A. Davidson analyst Gil Luria recommends ServiceNow as one software stock to buy in the AI era.
The software sector has shown some momentum after a tough stretch, leading to opportunities for investors willing to look past fears of artificial-intelligence disruption.
The iShares Expanded Tech-Software Sector ETF (IGV), a proxy for software stocks, is up 14% off its February lows. That marks &#34;a surprising comeback,&#34; according to DataTrek cofounder Jessica Rabe, and one that contrasts with roughly flat performance for the S&amp;P 500 over the same span. That said, the ETF is down 19% so far this year, reflecting concerns about AI displacement, while the S&amp;P 500 is down about 1%.
Compared with a few months ago, investors now have a more &#34;comprehensive view&#34; of how AI may affect the software sector, D.A. Davidson analyst Gil Luria told MarketWatch. He pointed to several software stocks with high growth potential and compelling valuations that are worth investing in.
Two enterprise-software companies that fit into that category are Box (BOX), which makes collaboration tools for businesses, and LiveRamp Holdings (RAMP), a data and marketing software company.
Shares of Box are down nearly 25% so far this year, while those of LiveRamp Holdings are up roughly 1%. Luria expects both stocks to outperform the broader market and software peers, noting that the stocks are both trading at multiples of price to free cash flow that are below historical levels and sector averages.
For example, on Tuesday, shares of Box were trading at roughly nine times the estimated free cash flow for the next 12 months. By contrast, the iShares Expanded Tech-Software Sector ETF (IGV) was trading at 28 times, according to Dow Jones Market Data.
Box's stock trades at a discount to its five-year historical average multiple of roughly 15 times on that metric.
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Luria also noted some software stocks that fall into the &#34;growth at a reasonable price&#34; category, including Dynatrace (DT) and ServiceNow (NOW). On Tuesday, Dynatrace's stock was trading at roughly 19 times estimated free cash flow data for the next 12 months, while ServiceNow's stock was trading at roughly 23 times, according to Dow Jones Market Data.
Dynatrace and ServiceNow are expected to report revenue growth of roughly 16% and 21% for calendar year 2026, respectively, according to FactSet estimates, while the consensus for the IGV is roughly 4%.
For growth stocks with higher valuations, Luria's picks included Snowflake (SNOW), Datadog (DDOG) and Shopify (SHOP). For the next calendar year, analysts tracked by FactSet expect revenue growth rates for Snowflake, Datadog and Shopify to be roughly 27%, 20% and 19%, respectively. However, Luria said he expects Datadog to grow revenue 30% this year.
One reason Luria said there's a positive shift in investor sentiment toward software stocks is that the reactions to earnings reports have improved. At the beginning of this earnings season, he said, investors unloaded shares of software companies that reported &#34;phenomenally good earnings&#34; because they were &#34;so worried about software that it didn't matter what you said.&#34;
More recently, however, shares of companies once considered &#34;AI hazards,&#34; including Salesforce (CRM), RingCentral (RNG) and Nice (NICE), rose despite results that Luria didn't think were particularly strong.
Luria said that even if AI will impact the sector &#34;way down the line,&#34; software is still worth investing in.
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-Hannah Pedone
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03-10-26 1437ET

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Software stocks are showing signs of recovery, with D.A. Davidson analyst Gil Luria recommending several stocks for investment, including ServiceNow, Box, and LiveRamp Holdings. The iShares Expanded Tech-Software Sector ETF has risen 14% from February lows, contrasting with the S&P 500's flat performance. Luria highlights stocks with compelling growth rates and reasonable valuations, noting improved investor sentiment towards software companies despite concerns over AI disruption. Key picks include Dynatrace, Snowflake, and Datadog, with expected revenue growth rates significantly higher than the sector average.

7 software stocks to buy as the sector shows signs of life