My favorite software stocks to buy right now

The software sector is having its biggest decline since the 2022 bear market, with the IGV software ETF down 31% over the past few months. Uncertainty is the biggest driver. Uncertainty about the durability of software moats, the seat based model, and the ease with which new entrants can enter the arena with the rise of AI.

In this article, I've nuanced which types of software businesses I believe are rightfully under pressure and which ones I think are sold off for the wrong reasons, throwing the baby out with the bathwater. In this follow up, I'll cover in more detail which ones are my personal favorites as a software investor.

Periods like this can create great opportunities if you know where to look and separate the great from the mediocre, because not all software is created equal. In this write up, I will focus on software businesses that share some characteristics I personally highly value when sifting through the software universe:

• Annual revenue growth above 20% (signals strong demand)
• Free cash flow positive (signals strong cash generation)
• Strong balance sheet (to weather potential storms and invest into the business)
• Beneficiary of AI (positioned to benefit from the shifting tech landscape)
• Stock is down more than 30% from its 52 week highs (less downside risk)

Time to dive into the software stocks I believe offer the most attractive risk reward today and why, along with a one pager infographic for each of them. The next section is exclusively for paid subscribers, as it reflects the work behind my own capital allocation decisions.

Honorable mentions

There are some names I do think deserve attention, but didn’t make it into my final list. Each and every one of them is, in my view, very high quality.

They didn’t make the cut because they didn’t check all the boxes above, mostly in the valuation category. I do think all of them are much more reasonably valued today versus a few months ago.

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