The software market in 2026 is running two concurrent stories, and misclassifying companies across them is where many portfolio construction errors occur. The essential task for investors is to determine which firms belong to each narrative and position accordingly.
AI as revenue driver - real, but selective
The proposition that AI would cannibalize traditional software revenue has not been borne out in quarterly results. By late August, company reports increasingly portrayed AI features as contributors to revenue growth, with Salesforce and CrowdStrike among those cited as leading the gains.
A snapshot of screener data underlines the sector split (values are screener snapshots):
| Company | Rev Growth | P/E (LTM) | YTD Return | FV Upside | Health |
|---|---|---|---|---|---|
| CrowdStrike (CRWD) | 24.3% | 6,575x | +107% | -46% | Good |
| Palo Alto Networks (PANW) | 24.5% | 950x | +104% | -40% | Good |
| Palantir (PLTR) | 78.9% | 147x | -3% | -25% | Great |
| Salesforce (CRM) | 11.2% | 23x | -3% | +36% | Great |
| Oracle (ORCL) | 21.6% | 22.5x | -27% | +33% | Good |
| Microsoft (MSFT) | 17.8% | 27.5x | +3% | +9% | Great |
The companies categorized as AI monetizers in the screener are priced for exceptional outcomes, with extremely high P/Es and negative fair-value upside using the cited metrics. That implies purchases of these names represent a bet on how long the current growth trajectory persists rather than on cheap valuation. Conversely, names such as Salesforce and Oracle currently show double-digit fair-value upside, making them candidates for fundamental-driven purchases.
M&A dynamics - a structural valuation floor
Discussions between Workday and Silver Lake established an explicit valuation floor for software M&A - a deal referenced as implying a private-equity willingness to pay around 15x free cash flow. That signal surfaced amid a near-term equity market response, as some European software stocks rallied on what was effectively a valuation re-rating across the sector.
Market moves in the wake of the Workday-Silver Lake dialogue included share-price reactions from a range of software companies, illustrating the contagion of a re-priced M&A backdrop across regional markets.
Truist has published what it frames as an M&A target roadmap, dividing names into two pressure buckets:
- "A List" - press/activist pressure: Commvault, Elastic, Five9, GitLab, HubSpot, UiPath, Varonis, Zeta Global
- "B List" - franchise value, no speculation yet: Dynatrace, Intapp, JFrog, Klaviyo, Paylocity, Qualys, Tenable
At the same time, Salesforce is playing both roles in the market: it appears undervalued on fundamentals and is also an active acquirer. In 2026 Salesforce executed multiple purchases - Listen Labs (~$2 billion), Fin/Intercom (~$3.6 billion), Contentful, m3ter, and Momentum - with the intent of building agentic AI capability into what the company positions as Agentforce.
Valuation caution from Goldman Sachs
Goldman Sachs offered a reminder against judging stocks by valuation metrics alone. In May, Goldman noted the median application-software stock had fallen 38% year-to-date while forward P/Es sat at 23.4x, the lowest level since 2014. Even with lower multiples, Goldman judged the sector likely to be range-bound for months, adding that positive investor reception to AI disclosures depends on whether the additional revenue is clearly additive to overall company growth.
That characterization provides a practical framework: software is not a single, homogeneous investment class today. Instead, it can be usefully divided into three cohorts:
- AI proof-of-monetization winners - names with confirmed AI-driven fundamentals but limited valuation upside per the metrics (examples in the screener include CrowdStrike and Palo Alto Networks).
- Structural undervaluation plays - companies where both M&A interest and fundamental re-rating offer a path to upside without requiring a deal to close (examples include Salesforce and Oracle).
- Speculative M&A targets - names where upside is binary and dependent on deal outcomes listed in the Truist roadmap rather than earnings performance.
The article concludes that the most durable portfolio positioning sits in cohort two: those firms where a rising M&A floor offers downside protection while fundamentals provide a mechanism for upside through re-rating, independent of deal activity.