Stifel analysts contend that the recent slide in enterprise software shares may not be a fleeting pullback but the opening phase of a deeper, sustained realignment. In a note that frames the software transition through the lens of the eCommerce disruption of the late 1990s, the brokerage cautions investors to temper expectations for a rapid rebound.
To make the comparison concrete, the analysts assign software companies to retail archetypes that emerged during the eCommerce era. Large incumbents that will fight to preserve market leadership are likened to Walmarts, fast-growing challengers positioning for the next cycle are compared to Costcos, firms likely to survive but not thrive are mapped to Macy's, and critically, the analysts do not anticipate public-company bankruptcies on the scale of Bed Bath & Beyond.
On near-term price action, the analysts draw a direct parallel to how 'traditional' retailers traded in the early 2000s, and they do not expect 'anything approaching a V-shape recovery for many software stocks in the coming quarters.' That warning underpins the note's cautious tone.
The analysts underscore the point with a historical parallel involving Microsoft. According to their review, Microsoft peaked at about $60 in December 1999, slipped below $40 by April 2000, and reached a low around $20 in December 2000. The stock did not regain the $40 level until April 2014 - a 14-year interval - even while revenue grew at a nearly 10% compound annual growth rate from $22 billion to $83 billion and earnings per share rose at an average rate of about 8% per year. Stifel attributes the eventual recovery to a change in management and an acceleration in Azure's growth.
The immediate investor concern is not that models from Anthropic or OpenAI will instantly unseat large enterprise deployments. Rather, the core question is whether incumbents can extract new monetization from AI capabilities, or whether they will be compelled to incorporate agentic AI into existing contracts to stave off competition, using it defensively rather than as an independent revenue source.
Margins are another focal point. The analysts expect AI-related costs to press on software's historically strong gross margins in a way reminiscent of the on-premise to SaaS transition. They believe some large language model providers are effectively subsidizing customer usage today, with certain prompt activity producing negative gross margins for the vendor. As those subsidies diminish and hyperscalers price infrastructure to justify massive capital expenditures, Stifel warns that the resulting margin reset could be material.
Valuation metrics, the note says, reflect this uncertainty. The iShares Expanded Tech-Software ETF - IGV - has seen its EV/NTM Revenue compress to 3.9x from a peak above 16x, though on a 20-year view the group is trading back toward its 2005-2017 range. On an EV/NTM free cash flow basis, IGV trades at 22.8x versus a time-series average of 38.2x. While cheaper, Stifel characterizes the group as not distressed and likely to remain range bound for the foreseeable future.
Stifel also regards private equity as a less likely rescuer than during the SaaS transition. The note points to PE's larger share of institutional allocations - often above 20% compared with low-single-digits two decades ago - higher debt costs, and challenges in returning capital from existing holdings. These factors, the analysts suggest, constrain PE's ability to step in at scale. Strategic consolidation is also expected to be muted, with IBM identified as a continuing exception given its acquisitions of open-source infrastructure assets following Red Hat and HashiCorp.
In terms of relative positioning, the analysts favor names tied to data, infrastructure consumption and security as relatively insulated in the near term. They cite recent results from Cloudflare and Datadog as supportive evidence. On the application side, Stifel expects SaaS incumbents that possess strong data gravity and deep domain expertise to be the likely winners as out-of-the-box agentic workflows emerge.
The note lists top picks that include CrowdStrike, Cloudflare, Palo Alto Networks, Salesforce, Guidewire Software, HubSpot, Braze, Titan Machinery, Datadog, MongoDB and Snowflake.
Separately, the note raises the practical question many investors face: is Microsoft a bargain at current levels? The original commentary references a Fair Value calculator that applies multiple valuation models to help assess MSFT and other stocks, though the analysts' central thesis remains that long-term sector dynamics and margin pressures tied to AI adoption are the primary risks shaping valuations.
Summary
Stifel's note draws parallels between the eCommerce-era reshaping of retail and the present software-to-AI transition. It warns of a potential prolonged realignment in enterprise software equities, highlights margin pressure from AI infrastructure and subsidy dynamics, flags uncertain monetization paths for incumbents, and points to compressed valuations across the software group.