By Sinéad Carew
June 3 (Reuters) - Software stocks have rebounded from a punishing selloff as investors are betting that AI may boost the sector rather than leaving it for dead.
The iShares Expanded Tech-Software Sector ETF has surged nearly 42% from its April low, turning fears that AI would rip the heart out of the industry into hopes that software firms will enlist AI as a valuable ally. The software ETF is down under 2% for 2026 after earlier falling 30%.
Now investors are flocking to firms they
see succeeding at integrating AI and adjusting price models by charging clients based on actual usage – while steering clear of firms that are too dependent on traditional pricing, which involves subscription fees based on headcount.
Analysts and portfolio managers point to security providers Datadog and Palo Alto Networks, chip design software developer Synopsys and giants Oracle and Microsoft as some of their favorites.
"While AI is causing massive disruption, it is remapping the industry rather than destroying it," said Daniel Morgan, portfolio manager at Synovus Trust in Atlanta.
After the recent months-long software selloff, many investors warned that the move was overdone and began kicking the tires on shares they considered too beaten-down while the broader technology sector, including chip stocks, was surging as investors pinned their hopes on the boom in AI.
The bounceback rally accelerated last week when strong financial results and guidance from Snowflake and MongoDB boosted sentiment. Thomas Blakey, managing director of software equity research at Cantor, said the results show that "software companies will be beneficiaries of AI."
"We always advise being selective," said Blakey, who rates both stocks 'overweight', but he said that "investors baked in a scenario that was too negative with regards to AI."
The latest star turn for software came with Monday's rally following comments from Jensen Huang, the CEO of AI chip leader Nvidia, who told the Computex conference in Taipei that AI agents will boost software demand as the "world is no longer limited by the number of people, therefore those agents are going to use more tools than ever."
"This is actually an incredible time to be a software company," Huang said.
LONG-TERM PICKS
The question now is what happens next in a sector where investors have come to expect volatility.
The software ETF fell 2.8% on Tuesday. Its drags included a 4.2% pullback by Salesforce, which had advanced 9.7% on Monday amid excitement about its role as a major investor in and user of Anthropic, which filed for a market debut.
Many investors say that the key is to choose the right stocks for the longer haul.
Jonathan Cofsky, a portfolio manager at Janus Henderson, likes cloud security company Datadog because of its usage-based pricing and increasing demand from data centers powering AI. Datadog stock hit a record high on Monday and has almost doubled in value this year, including a 31% one-day rally after it boosted annual financial targets on strong demand for security tools, thanks to AI.
Doug Rogers, portfolio manager at Eaton Vance, likes Palo Alto. While its firewall sales depend partly on clients' user numbers, Rogers sees increased security threats boosting profits.
"As the number of potential threats and vulnerabilities and the awareness of those vulnerabilities increases, so should the price Palo Alto is able to charge for defending against them," Rogers said. Palo Alto fell on Tuesday but hit a record high on Monday and was still up more than 61% for the year.
Marc Dizard, chief investment officer at Huntington National Bank, likes Oracle as its large customer base provides "more time to get their pricing model correct." Oracle shares now show a more than 25% gain for 2026 after clawing back from a roughly 30% loss.
Investors see Microsoft, whose shares are down nearly 9% for 2026 after falling as much as 26%, as a safe bet even though much of its revenue is subscription-based. Rogers at Eaton Vance says Microsoft's AI assistant - Copilot - and Azure - its cloud computing business - provide "a lot of opportunity" to capitalize on AI.
"Given its size and breadth it's more than a survivor. It'll always be in the game," said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder.
(Reporting by Sinead Carew; Additional reporting by Max A. Cherney and Wen-Yee Lee in Taipei, Chuck Mikolajczak and Terence Gabriel in New York; Editing by Colin Barr and Muralikumar Anantharaman)
