UBS said in a note Thursday that the recent, sharp compression in global software valuations has produced selective opportunities for investors, with the bank singling out five companies that screen well on both valuation measures and earnings revision trends.
Analyst Andrew Garthwaite described the sector as currently "6.1 standard deviations oversold" and experiencing a "record decoupling from earnings momentum," adding that software ranks fourth globally on that metric. UBS pointed to several supportive signals, including what it called a "record decoupling from both dollar and macro variables." Using its Market Narrative model, the bank estimates U.S. software appears roughly 40% undervalued.
At the same time, Garthwaite warned that a weaker U.S. dollar would be a headwind for European software companies, a dynamic the note says investors should consider when allocating across regions.
Despite ongoing structural concerns around disrupted business models in parts of the sector, UBS observed that software's price-to-earnings premium has narrowed markedly. The note states the premium sits at about 18%, versus a historical average of 52%. UBS noted that historically these compressed premium levels have coincided with sector outperformance "67% on a 1-year view," though it also cautioned that free cash flow yields "are in general not compelling."
Given those mixed signals, the bank recommended a selective approach rather than broad exposure to the sector, explicitly favoring U.S. names over European ones.
UBS listed the stocks that meet its combined criteria of being "cheap on HOLT, have a P/E relative below their norm and positive earnings revision" as follows: Microsoft, HubSpot, ServiceNow, Autodesk and Constellation Software.
The firm added that its U.S. teams are inclined toward infrastructure- and data-exposed businesses, naming Snowflake and Datadog, and it highlighted cybersecurity firms such as Zscaler as preferred plays within those themes.
On the European front, UBS identified SAP, Amadeus and Planisware as companies that should be relatively insulated from displacement risks related to artificial intelligence, citing their strong enterprise entrenchment and the complexity of the workflows they support.
Should you be buying MSFT right now? ProPicks AI evaluates MSFT alongside thousands of other companies every month using 100+ financial metrics. Using powerful AI to generate stock ideas, it assesses fundamentals, momentum, and valuation without bias, identifying names that offer attractive risk-reward based on current data. The AI highlights stocks across sectors and can indicate whether MSFT appears in any model strategies or if other opportunities exist in the same space.