Is it time to plug into software again?

The software sector was heavily shaken in the first quarter on fears AI was going to eat their lunch. Valuations plummeted and, as a result, software stocks are currently trading far cheaper than the overall S&P 500, their lowest ever relative P/E. This is a remarkable turnaround: at their 2021 peak, the multiple for software stocks was more than double the index.

With AI uncertainty reflected in lower software sector prices, the risk-reward calculation has improved significantly. The software stocks in Harris Associates US Value Equity Fund now trade nearly 30% cheaper than average industrial stocks.

Bill Nygren, portfolio manager of the Harris Associates US Value Equity Fund is sceptical about the durability of this discount. “Are software businesses so much worse than industrials, that they deserve such a large discount?” he asks. “We believe the answer is an emphatic no, especially considering their much higher expected growth.”

Stepping into controversy after sharp declines is nothing new for Harris. Bill says: “It doesn’t guarantee success, but it has been central to our approach and long-term results.”

It’s also a key reason why, in an industry where firms come and go, Harris is celebrating its 50th anniversary this year.

A delicate balance: partnerships vs disruption

The selling of software stocks eased later in the first quarter on growing evidence of the potential for AI to form partnerships with software groups rather than simply displacing them, notes Solian Varlet, portfolio manager for the Mirova Global Sustainable Equity fund. Partnerships announced include the tie-ups between Anthropic and companies across various industries that are integrating their AI plug-ins.

The future balance of partnership vs disruption is, at this point, unknowable. After all, the reason software stocks sold off regardless of fundamental or competitive advantages is that the AI disruption fear cannot be disproved.

“We don’t believe we will see this go to the extreme point where all software is disrupted, but we do know that software companies will have to adapt,” comments Soliane.

AI disruption is probably overestimated, she says, and the market has probably overreacted, though it is difficult to know by how much. While not all software companies are well positioned, the companies that are expected to benefit from AI are the ones with decades of expertise, hold the most important enterprise data, and are fully embracing AI themselves.

While valuations at this stage are discounting strong declines in revenues and profits for software companies, Soliane adds that “due to lack of visibility we have not significantly added to the position while we continue to further analyse the situation for each company”.

Shopify swept up by selling storm

Shopify is an example of a software company swept up in the overall negative software trade at the start of this year. Shopify is a leading global provider of mission-critical commerce infrastructure that enables retail companies to start, grow, market, and manage a retail business of any size.

After a very strong run last year, concerns that surfaced in the first quarter of this year about a potential step-up in payment processing costs from ChatGPT-powered checkout tools.

“However, that is not a big issue for Shopify in our view,” says Soliane. The company has invested strongly in agentic commerce, and its overall AI-driven traffic is increasing significantly, while a partnership with OpenAI since September 2025 opens up new service areas.

In Soliane’s view, for most merchants, having access to 900 million active users on ChatGPT fully justifies the 4% payment costs. In addition, Shopify is plugged into the Google and Meta LLMs. “All in all, we believe Shopify is an AI beneficiary,” she concludes.

Challenging the prevailing narrative

Shopify gets the thumbs up from Loomis Sayles too, which has held the stock in its Global Growth Equity Fund since the first quarter of 2022.

Shopify reported strong quarterly results that were above both consensus expectations and management’s guidance for most key metrics, notes Aziz Hamzaogullari – Founder, CIO, and Portfolio Manager for Growth Equity Strategies – including gross merchandise volume (GMV), revenue, adjusted operating profit, and free cash flow.

Despite the positive results, which included continued market share gains, shares traded down likely due to mixed guidance and a prevailing market narrative that AI poses an existential threat to enterprise software companies.

Aziz believes that narrative is flawed. Companies such as Shopify and other portfolio holdings, including Autodesk, Oracle, Salesforce, and Workday, provide mission-critical services to their clients, he says. These clients would face high switching costs if they moved to other providers.

“We believe this dynamic is reflected in both their pricing power and the high degree of client retention for these businesses,” says Aziz.

AI may actually prove additive to the core functions these companies provide and should not negate their core competitive advantages, such as sticky client relationships, distribution reach, proprietary data, a reputation for reliability and security, integration for mission-critical corporate functions, and domain expertise.

AI more likely to expand than shrink sales

In other words, AI is more likely to expand the total addressable markets of software companies than threaten their core businesses. Unless these companies cease to continue to innovate and don’t themselves employ AI to further differentiate their products and services, Loomis Sayles does not believe AI represents an inherent threat to their core businesses.

As a function of strong secular growth drivers and numerous competitive advantages, Aziz believes Shopify can sustain mid-to-high-teens total revenue growth over a long-term investment horizon.

He notes: “We believe current market expectations are substantially underestimating the company’s multiple long-term secular growth drivers and the strength of the company’s business model and competitive positioning.

“As a result, we believe the shares trade at a significant discount to our estimate of intrinsic value and offer a compelling reward-to-risk opportunity.”