UBS US Software: The Software Meltdown – Stay Patient or Buy the Dip?
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The US software sector has experienced a severe sell-off, continuing a negative trend that has persisted throughout the year, sparking intense debate over AI disruption risks. UBS notes that while AI-driven transformation is impacting the software industry faster than anticipated, most SaaS and application companies are merely maintaining, rather than accelerating, their growth rates, with no material evidence of direct AI disruption yet.
Since August 1, 2025, the software sector (IGV) has delivered a cumulative return of negative 21%, sharply contrasting with a 46% gain in semiconductors (SOXX) and a 29% rise in hardware. This divergence stems from rapid improvements in AI models, declining inference costs, and rising enterprise AI adoption. Software companies face potential structural transformations, including faster core rewrites, compressed gross margins, and new pricing models.
Currently, software stocks are primarily valued on non-GAAP price-to-earnings multiples, with a median of 23 times. If investors collectively shift toward stricter GAAP-based frameworks, the current downturn may not have reached its floor.
UBS advises investors to remain patient and maintain a short-term preference for infrastructure, data, and cybersecurity stocks, which carry lower AI disruption risks. Within the SaaS and application space, the firm highlights ServiceNow and Salesforce as potentially resilient, while favoring usage-based or vertical-specific smaller companies like Twilio and AppFolio.