Software stocks are in a freefall. Adobe stock price continued its freefall this week, reaching its lowest level since April 2020. It has now erased all the gains made during the pandemic, while its market capitalization has plunged from $350 billion to $107 billion today.
Adobe stock and other software companies have plunged
Other software companies are in a freefall too. ServiceNow’s stock price crashed to $109 on Tuesday, down from the all-time high of $239, while Microsoft has plunged to $411 from the record high of $553.
Other top companies in the software industry, like Intuit, LegalZoom, and Atlassian, have all continued their strong downward trend this year.
As a result, the closely-watched iShares Expanded Tech-Software Sector ETF (IGV) plunged to $85 from its all-time high of $117. Its biggest constituent companies are Microsoft, Palantir, Salesforce, Oracle, Intuit, AppLovin, Adobe, and Palo Alto Networks.
There are three main reasons why these software stocks have imploded this year. The most important one is that there is the ongoing fear that these companies will be disrupted by AI tools, especially those made by Anthropic.
For example, companies like LegalZoom and Thomson Reuters plunged on Tuesday after Anthropic released a new tool to automate legal work, including contract reviewing and legal briefings.
Other software companies plunged after the company launched Claude Cowork tool, which can automate most tasks done by companies. The fear is that AI will disrupt these industries as tools get more advanced.
However, in reality, past fears of major disruption have not lived to the hype. A good example is when fear spread that Amazon would collapse retailers like Walmart. Today, Walmart is doing better than ever, with its market capitalization rising to over $1 trillion.
Also, it is hard to see how AI will disrupt some tools like QuickBooks, which are used by thousands of companies globally.
Software companies’ growth momentum is fading
The other main reason why software stocks like Adobe and ServiceNow are plunging is the fact that their growth momentum has stalled, with many of them turning to acquisitions to bolster growth.
Adobe acquired Semrush in December last year, while ServiceNow bought Armis and Moveworks in 2025.
Salesforce continued its acquisition spree, buying companies like Informatica in a $8 billion deal. Atlassian bought The Browser Company.
Analysts believe that these companies will continue slowing down in the coming quarters. For example, the average estimate is that Adobe’s revenue growth in 2025 was 9.52% to $26 billion. They expect that it will grow by 9% this year to $28 billion
Other software companies like ServiceNow, Salesforce, and Atlassian are expected to continue slowing in the coming years.
Additionally, software stocks have plunged because of their valuations, which surged in the past few years. As a result, companies like Adobe and ServiceNow are going through a valuation reset.
Adobe now trades at a forward PE ratio of 12, down from the five-year average of 30. ServiceNow has a forward PE ratio of 28, down from the five-year average of 67, while Atlassian’s PE ratio of 23 is lower than the average of 111.
Will Adobe and other software stocks rebound?
Warren Buffett has always recommended buying when everyone was fearful and sell when everyone was greedy. This view has worked well in the software industry as the crash happened when most people were greedy.
Therefore, the most likely scenario is where the stocks continue falling in the near term and then rebound later this year or in 2027 as investors start buying the dip. The stocks will also rebound as the fears of their businesses being disrupted by AI ease.
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