Software stocks have taken a meaningful drawdown. Salesforce, Adobe, and Intuit are down roughly 47%, 61%, and 45% from recent highs. Even Microsoft, a company that typically trades with more stability, has declined close to 27% from its peak.
Periods like this tend to raise a fundamental question for investors:
Are these declines signaling a deterioration in business quality, or a shift in how the market is pricing the future?
At first glance, the price action suggests something has broken. Underneath, the operating performance tells a different story.
Revenue growth remains intact. Margins continue to expand. Earnings estimates, in many cases, are still moving higher.
Which leads to a more precise question:
If fundamentals are holding up, what exactly is the market reacting to?
The Market Is Pricing What Might Happen
The answer lies in expectations, not current results.
Investors are reacting less to what these businesses are doing today and more to what artificial intelligence could mean for the durability of the SaaS model. The concern is not about present performance, but future economics.
This represents a meaningful shift in narrative.
In 2011, Marc Andreessen argued that software would reshape nearly every industry. That view proved largely correct. Software became embedded across retail, transportation, finance, and healthcare, creating durable revenue streams, high margins, and predictable growth.
Now the question has changed.
Instead of software disrupting everything else, investors are asking whether A.I. will disrupt software itself.
Valuations Have Already Reset
The repricing has been significant.
Five years ago, many SaaS companies traded at 18 to 19 times forward revenue. Today, that multiple is closer to 5 to 6 times. This is not a modest adjustment. It is a full reset in how the market values the sector, and it has occurred without a corresponding deterioration in business performance.
Markets do not wait for outcomes to materialize. They discount future possibilities in advance. Today, the market is assigning lower valuations because it believes future economics may be less attractive.
That belief may prove correct. But it is still a belief.
The Case for Adaptation
It’s important to consider the nature of these businesses.
These are not early-stage companies. They are deeply embedded platforms at the center of enterprise workflows, integrated across thousands of organizations.
Companies with that level of integration tend to adapt rather than disappear. They have the capital, talent, and customer relationships to evolve alongside new technology. In many cases, they are already incorporating A.I. into their own offerings.
This does not eliminate risk. It does, however, challenge the idea that disruption will be one-sided.
This type of setup is not new.
When uncertainty rises, markets tend to price a wide range of negative outcomes before there is clear evidence those outcomes will occur. We have seen this pattern across industries and cycles.
Sometimes those concerns are justified. Other times, markets overshoot, creating a gap between perception and reality.
The current environment in software reflects that same tension. Expectations have shifted faster than fundamentals.
What Matters From Here
The question is no longer whether A.I. will change software. It will.
The more relevant issue is how that change affects the economics of existing businesses. Will margins compress? Will pricing power weaken? Or will these companies use A.I. to deepen their value and extend their reach?
Those answers will take time.
For now, the data shows a sector that remains fundamentally strong, paired with valuations that reflect a far more cautious outlook.
That tension is where mispricing can emerge.
Time will determine whether current pricing reflects a durable shift in economics or an overreaction to uncertainty.