US software names crunched, now what?

12 September 2025
Author: Sandstone Insights

US software names like Adobe (ADBE.US), Salesforce (CRM.US), and ServiceNow (NOW.US) are among the worst performers in the S&P 500 this year, on fears that AI will disrupt the software business model. We outline the case for why AI will accelerate growth for software companies.

Crunched in 2025

High-profile fast-growing software businesses like Adobe, Salesforce, and ServiceNow have been some of the worst-performing stocks in the S&P 500 this year. Secular trends of software growth, powerful SaaS revenue models, and large total addressable markets with net cash balance sheets have allowed earnings to outpace revenue growth for many years.

Locally, the 25% sell-off in Xero (XRO) since its all-time high in Jun 25 presents a clear opportunity for investors to position themselves what we see as powerful secular trends.

Software vendors have provided the systems to companies from SMEs to global corporations for years, earning the trust of clients by delivering reliable, scalable solutions. The idea that AI will empower management teams to pivot away from their core business by using AI to develop in-house software makes little sense to us.

Figure 1: AI eating software’s lunch? We don’t think so

Source: Visible Alpha, Sandstone Insights

AI will eat software’s lunch

At the heart of the recent sell-off is the thesis that AI will destroy their business models of leading software names. AI will stall software’s growth, and ultimately the moat around these names. Desktop publishers will no longer use Adobe’s suite of tools to create and edit images for display on the web.

Salesforce will be rendered obsolete by AI, which can create a travel agenda based solely on your prospects emails in Office 360. Accounting specialist Xero’s TAM will be much reduced as traditional banks add agentic AI tools to their core banking products, displacing the role of specialist accounting software tools.

In our view, the narratives that AI poses an existential threat to software companies overlook a key point – AI is likely to improve margins (lowering the cost base) and accelerate growth (through larger, more valuable product suites) for infrastructure software providers. Like Xero, here in Australia.

Software vendors with foundations based in data, networking, observability, and security have powerful moats, and in our view, are likely to be difficult to dislodge.

AI will not destroy software business models

If AI was supposed to eat the revenue of software companies, then why are we beginning to see software vendors show accelerating revenue growth? AI is becoming a tailwind for quality software firms. From Intuit (INTU).

“We launched a transformative all-in-one business platform with a virtual team of AI agents and AI-enabled human experts that can manage lead to cash for customers.” CEO Sasan Goodarzi 4Q25 Conference Call.

Figure 2: AI begins to accelerate Intuit’s revenue growth

Source: Visible Alpha, Sandstone Insights

Figure 3: XRO revenue has been consistently +20%, with growth expected to continue at similar rate into 2027E

Source: Visible Alpha, Sandstone Insights

Xero opportunity

The XRO share price is down ~ 25% from its all-time highs in mid-2025. The surprise acquisition of US loss-making payments business Melio for US$3bn, combined with the meltdown in US software share prices, has weighed on the XRO share price. Since Melio, there are 7% more shares on issue, and earnings forecasts for FY26E are 10% lower.

The acquisition raises questions about management's strategy. Melio is expected to incur losses for three years, a drag on earnings. US payments industry is a very competitive space, and there are market concerns around the negative impact AI may have on software companies.

XRO’s core business continues to perform well. Another round of price rises was implemented in Jul 25. Customer plans have been restructured in the UK and the US, and new company registrations continue to increase, with nearly 36,000 new companies registered in Australia in July.

EPS growth is forecast at 46% in FY26E and 39% in FY27E, so earnings growth, although somewhat blunted by Melio, remains very high.

Xero is a high-quality company that has been duly punished for the acquisition and caught in the AI-related software sell-off.

The punishment is now overdone, and the stock is back to attractive buying levels. Upcoming catalyst is the 1H26E earnings release in mid-November.