The Bull Case For Software Stocks

Today’s Letter Is Brought To You By Fountain Life ! Are you ready to seize the day that will change your life , guaranteed? You invest in wealth creation every day, but what’s the point of it without an optimal healthspan? Award-winning Fountain Life is the world’s most advanced longevity destination. And in just one day , we use AI-Guided Diagnostics to map an exact and complete picture of your health profile. No guesswork. No blind spots. From there, we create a personalized plan that prevents disease and may even reverse aging by using precision medicine and Restorative Therapeutics, available nowhere else. In other words: Your energy is supercharged, memory sharper, life extended, so that you can live without limits. It’s the best investment you’ll ever make. Use code POMP and receive $1,000 off the cost of a life-changing membership with Fountain Life when you schedule a call. Schedule A Call To investors, The word “SaaSpocalypse” has gone viral on Wall Street. Since September of last year, the S&P North American Technology Software Index has shed 32% of its value. That is a BIG drop for just a few months. Salesforce is down more than 26%. Adobe has lost 20%. Dozens of mid-cap SaaS names have been cut in half. If you have been watching enterprise software stocks lately, you have been watching a sector get completely repriced. And if you have been an investor holding these stocks, your portfolio has not been fun to look at. But what if everyone panics and gets ready to dump their positions at the bottom of the drawdown? What if the worst is behind us? I don’t have a crystal ball, nor am I trying to call the bottom here, but here is what a contrarian would argue right now: the market has overreacted, the dominant narrative is factually broken, and investors who buy right now may be staring at some of the best entry points in a decade. Before we talk about what could happen in the future, we have to unpack how we got here. The pain arrived in two distinct waves. The first was macroeconomic. When the Federal Reserve raised interest rates at the fastest pace in history during 2022, long-duration assets got crushed. There are very few assets that carry more duration than a fast-growing software company with cash flows priced ten years into the future. For example, the Bessemer Cloud Index saw its median public SaaS revenue multiple crater from an all-time peak of 18.4x forward revenue in September 2021 to roughly 6x by early 2026. That alone was a brutal reset. Just that metric saw a 65% decrease by itself. The second wave of pain was structural though. Frankly, this one was far more alarming to investors. The best way to understand it is that the rise of AI agents introduced what analysts now call “seat compression”: the idea that a single AI agent can perform the work of multiple employees, so enterprises need fewer software licenses. Atlassian saw its stock plunge 35% after reporting its first-ever decline in enterprise seat counts. Whoops! Workday announced layoffs of 8.5% of its workforce and directly cited AI as one of the contributing factors. If those examples weren’t bad enough, the January 2026 CIO survey found IT budget growth was expected to be only 3.4%. Most analysts argue that a big portion of budget growth was withheld because dollars are being rerouted toward more than $660 billion in planned hyperscaler AI infrastructure spending. That is obviously a big number. And when the market sees a big number attached to a scary prediction, they panic quickly. That is exactly what happened earlier this year. A good example is when price-to-sales multiples compressed from 9x down to roughly 6x in a matter of weeks. For context, these are levels we have not seen since the mid-2010s. But here is the thing, the sell-off in software stocks has not been uniform. There is a bifurcation between AI infrastructure software and traditional application software. Palantir surged 135% in 2025 because they saw 121% year-over-year growth in their US commercial revenue. Palantir also gave fiscal 2026 revenue guidance of $7.2 billion, which was a number substantially higher than analyst expectations. Good companies, with real growth, can buck nearly any trend. Other examples include Microsoft Azure crossing $50 billion in quarterly revenue and still growing 39% year-over-year. Oracle Cloud Infrastructure grew 84% in a single quarter and then told the market they had a $553 billion backlog. It is very hard to argue that a company is not going to be more valuable in the future when it claims to have half a trillion dollars of backlog. Now let’s compare this to what happened on the other side of the market. A painful example has been Salesforce. They have lost more than a quarter of their market cap. Adobe’s forward price-to-earnings multiple has compressed to roughly 10x, even though the company is still growing revenue at 12% annually. This low of a multiple usually implies a business is in terminal decline. CrowdStrike may be an even more confusing example. They are widely thought of as a structural winner in cybersecurity, yet they trade 20% below their five-year average price-to-sales multiple despite a dominant market position that grows more critical with every AI deployment. My big takeaway from these examples is that the market is treating all non-infrastructure software as damaged goods. This is where a contrarian would argue the market is making a mistake. So what is going on here? The prevailing bear thesis assumes that AI will displace SaaS. The pessimists believe that companies, particularly large enterprises, will stop paying for software subscriptions as AI agents absorb the workload. Could that be true? Sure. Is it the obvious conclusion from the current facts? Absolutely not. A contrarian would argue this logic has a fatal flaw because the incumbents are not standing still. They are building the AI layer themselves, including their advantageous use of two decades of proprietary enterprise data, customer relationships, and distribution that no startup can replicate overnight. Basically, incumbents only get disrupted if they don’t disrupt themselves first. Let’s go back to Salesforce. Their Agentforce AI agent platform hit $800 million in annual recurring revenue in fiscal 2026, which they report is up 169% year-over-year. That platform is now shifting to a consumption-based, outcome-driven pricing model. If it works and continues to scale, it will be hard for a startup to compete with Salesforce’s distribution advantages. Another one to pay attention to is ServiceNow’s generative AI suite (Now Assist). They reported crossing $600 million in annual contract value and are on pace for $1 billion by year-end. It is hard to ignore $1 billion in contract value. Then let’s not forget Microsoft, the big dog of software. They launched a new M365 enterprise tier priced at $99 per user per month, which is 65% above its prior top-tier plan, with the hopes of capturing AI value directly through their existing install base. So the bears may be loud right now, but these examples are not threats to the SaaS business model. Instead, they are the SaaS business model evolving into something more powerful and benefitting directly from the AI tech trend. Another important point here is that many of these companies are switching from an individual license revenue model to a consumption-based pricing model. The idea is to charge a customer by tasks completed or outcome delivered, rather than by user seat. This business model evolution combined with the fact that enterprise software spending is projected to grow 15% this year, makes it more difficult for the people predicting the demise of software stocks. The companies best positioned to capture this increased spend are the ones with the enterprise relationships, compliance infrastructure, and workflow integration that incumbents already own. Bain & Company’s own research confirms that customers overwhelmingly prefer to buy AI-enabled solutions from their existing vendors. This is common sense. Companies will buy from people they know and brands they trust, as long as the technology and cost are competitive. So what has to happen for the bears to be wrong and software stock investors to be happy again? This is where things get a little complicated. There is no magic bullet. Instead, investors are going to need a few things to go right. First, AI monetization must cross a credibility threshold. Confidence in Salesforce returns if Agentforce revenue surges north of $1 billion ARR. ServiceNow needs Now Assist to clear $1 billion in ACV. Microsoft needs to demonstrate that Copilot is lifting average revenue per user in a sustained, measurable way. Those data points, which could arrive as early as the second half of this year, will shift the market narrative from “AI is disrupting SaaS” to “SaaS is monetizing AI.” The second thing that needs to happen is various enterprise IT budget data sources must confirm net expansion in software spend despite seat compression. This would be the most concrete way to disprove the bear thesis. Lastly, stability in the macro environment is going to matter. If interest rates go up, that is going to cause more pain. But if rates stay flat, or even continuing being cut, then I would expect some of the multiple-compression headwinds to dissipate. This would then allow a true re-rating upwards to begin. So if the bears are wrong on these software stocks, how much money could an investor potentially make going forward? The good news is that valuation multiples across popular, quality software names is the most compelling it has been in years. Microsoft trades at roughly 24x forward earnings with 14% annualized earnings growth expected. The median Wall Street price target is $600, which is about 50% higher than the current share price. Cloudflare has a similar situation. They have a median analyst target of $245, which would be about 40% higher from current prices. Snowflake, who is still growing revenue 29% year-over-year, trades at 13x price-to-sales, yet the consensus target implies 43% upside. These are not small numbers and I am not even talking about the highest analyst targets. But if you really want asymmetry, a contrarian would argue Adobe is perhaps the most asymmetric setup. They currently trade around 10x forward earnings with double-digit revenue and earnings growth. As mentioned, the market is pricing structural decline into a company that is still compounding. If Adobe reverted to a normalized 25x multiple, that would imply approximately 150% upside before accounting for any earnings growth. There is example after example across the public markets of these situations. Analysts at multiple firms are projecting 40–50% upside merely from multiple expansion alone for quality software names that execute on AI monetization. That is before you layer in the earnings growth trajectory that would likely follow from a successful embracing of the new technology. Remember, the SaaSpocalypse is so overdone that the narrative assumes the industry is being disrupted into irrelevance. The data is telling a very different story though. Maybe the SaaS companies aren’t being disrupted from the outside, but they are evolving internally into something more valuable, with higher revenue per customer, lower marginal delivery costs, and a total addressable market that is tripling over the next four years. If that is the case, the entry price for these companies has been put on a flash sale thanks to investor fear in recent weeks. The big question is whether the fear will have been warranted in hindsight. I hope all of you have a great start to your week. I will talk to everyone next time. - Anthony J. Pompliano Founder & CEO, Professional Capital Management 🚨Webinar: Learn How To Use Bitcoin in Tax-Advantaged Accounts Join myself and Chris Kline, Co-Founder of BitcoinIRA, for a FREE live webinar on how the right tax structure can change your financial life. We’ll cover Bitcoin’s role in a modern portfolio, tax-advantaged account strategies, and what investors should be thinking about right now. Learn about: ✅ How taxes quietly destroy wealth ✅ The accounts high earners actually use ✅ Live Q&A with Pomp Don’t miss the opportunity to get your questions answered directly by myself and Chris Kline ! Register Here Why Bitcoin Could Hit All-Time Highs Again in 2026 Jordi Visser is a veteran macro investor with 30+ years of experience and the author of the VisserLabs Substack . In this conversation, we discuss rising inflation, higher oil prices, and why he believes markets are entering a new regime driven by supply shocks and geopolitical risk. We also explore asset rotation into commodities, risks in private credit, and bitcoin’s growing role as liquidity and capital flows shift globally. Podcast Sponsors Figure – True DeFi Democratized Prime to earn ~9% APY! They also have the lowest industry interest rates at 8.91% with 12 month terms! Take out a Bitcoin Backed Loan today and buy more Bitcoin. Check out Figure ! Figure Lending LLC dba Figure. Equal Opportunity Lender. NMLS 1717824. Terms and conditions apply. Arch Public - Arch Public’s cutting-edge algorithmic tools ignite profits, harnessing razor-sharp data analytics to nail perfect entries, exits, and risk management. Turn volatility into opportunity and do it hands free with Arch Public. (Oh, and yes, try us out for FREE too!) Uphold - Uphold is the all-in-one platform to trade, earn, stake, and swap across 300+ assets with real-time proof-of-reserves and any-to-any conversions. Manage your entire crypto portfolio in one place at www.uphold.com BitcoinIRA - Buy, sell, and swap 80+ cryptocurrencies in your retirement account. Pay less taxes. Earn up to $2,000 in rewards. Award-winning Fountain Life - Energy supercharged. Memory sharper. Life extended. Ready for the best investment you’ll ever make? Schedule a life-changing call at www.FountainLife.com Summ – (formerly Crypto Tax Calculator) generates accurate IRS-ready tax reports that help maximize deductions and pay the least tax possible. With support for 3,500+ exchanges, wallets, and protocols, Summ makes crypto taxes simple. Visit Summ.com and get 20% off with code POMP20. Bitget - Bitget is the world’s largest Universal Exchange (UEX) , serving over 125 million users with access to over 2M+ crypto tokens, and TradFi markets such as 100+ tokenized stocks, ETFs, commodities, FX and precious metal like Gold. Abra - This podcast is sponsored by Abra. Abra is the secure way to access crypto and crypto based yield and loan products through a separately managed account. To create an account, click here for individuals and here for entities. Simple Mining offers a premium white-glove Bitcoin mining service. Want to grow your Bitcoin stack? Visit https://www.simplemining.io/pomp 🚨READER NOTE: If you want to sponsor The Pomp Letter, you can fill out this form and someone from our team will get in touch with you. You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.