Software stocks have experienced notable downward pressure in recent weeks, but Citi views that weakness as creating a potential buying opportunity rather than signaling broad fundamental deterioration. In a note to investors, Citi outlined a targeted screen designed to find software companies that have seen price declines while exhibiting improving earnings expectations.
The bank's criteria were specific. Citi screened for software names that have dropped at least 10% over the prior month and, concurrently, have seen consensus EPS estimates for 2025, 2026 and 2027 revised higher over the last six months. In addition, the bank required that the stocks' implicit terminal multiples have fallen and now sit below forward price-to-earnings (P/E) ratios.
"Basically, we are looking for stocks where the terminal multiple has de-risked enough so a potential price recovery from here is not solely predicated on sentiment or technical-driven re-rating," the Citi team led by Drew Pettit wrote.
From an eligible universe of roughly 90 software names, the screen produced 22 names. Citi said the resulting list is skewed toward Buy-rated stocks and highlighted several names its software analysts view as well-positioned across potential AI outcomes. Examples named by the bank include Dynatrace (NYSE:DT), Microsoft (NASDAQ:MSFT), Cloudflare (NYSE:NET) and Rubrik (NYSE:RBRK).
Separately, Citi noted that Buy-rated stocks seen as relative winners in a bear "AI Disruption" scenario include Palantir Technologies (NASDAQ:PLTR).
The bank's analysis points to an important distinction in the recent selloff: markets appear to be "punishing terminal multiples" because of uncertainty around AI-driven business model risk, rather than reacting to worsening near-term fundamentals. Citi quantified the market's re-pricing, estimating that a roughly 10% cut to terminal multiples for the S&P 500 Software & Services group is already fully priced in, while a deeper 20% reduction is only partially reflected in current valuations.
Even with the multiple compression, Citi argued that software stocks are not being asked to deliver unreasonable implied growth. Under scenarios where terminal multiples are lowered by 10% to 20%, the analysts said upward earnings revisions should still influence share-price performance, at least on a relative basis.
Looking ahead, Citi suggested that in a market environment that is both fully valued and more volatile, earnings momentum will play an outsized role. Positive revisions for software companies, the bank concluded, could serve as an important fundamental catalyst to attract investors back into names that have corrected along with the broader group.
This assessment reflects Citi's internal screening and the bank's interpretation of valuation dynamics in the software sector amid AI-related uncertainty. The bank did not introduce additional forecasts or new company-specific financials beyond the screening outcomes and the examples it cited.