Key Takeaways
The software sector’s main tracking fund, the iShares Expanded Tech-Software Sector ETF (IGV), has fallen more than 20 percent this year as fears mount that artificial intelligence will disrupt established business models.
"You need to find stocks that people think are AI losers that are really winners," said Pat Walravens, head of technology equity research at Citizens. "Buying all software stocks isn’t the right way to think about it."
The sell-off, which saw the IGV fund drop nearly 6 percent in a single day after earnings from IBM and ServiceNow, has given way to a rebound in some names. CrowdStrike is up more than 22 percent in the past month, while Palo Alto Networks has gained nearly 24 percent, even as both remain slightly down year-to-date.
The divergence suggests investors are reconsidering the initial panic. Analysts argue the broad downturn is more about "indigestion as opposed to a total collapse in demand," as Quantum Financial Advisors' Joseph Rinaldi puts it, creating discounted entry points into firms poised to benefit from the AI transition.
Wall Street is increasingly pushing back against the idea that AI is a threat to cybersecurity firms, arguing instead that it’s a powerful growth driver. Mizuho recently upgraded CrowdStrike (CRWD) to outperform with a $520 price target, citing "very healthy demand." JPMorgan separately highlighted CrowdStrike and Palo Alto Networks (PANW) as "obvious beneficiaries" of an accelerating threat landscape tied to generative AI.
Both companies were named as the only two pure-play cybersecurity partners in Anthropic's Project Glasswing, a coalition built to secure the next generation of AI models. "You can't have AI without security," CrowdStrike CEO George Kurtz said recently, arguing that security is an "accelerant to rolling out AI," not a victim of it.
The search for mispriced opportunities extends beyond cybersecurity. Walravens recommends data analytics infrastructure firm DigitalOcean (DOCN), noting its focus on smaller companies could fuel revenue growth of more than 20 percent this year and another 30 percent in 2027.
He also favors travel software company Navan, a view shared unanimously by Wall Street. All 15 analysts covering Navan have Buy ratings on the stock, with a consensus price target that implies nearly 40 percent upside from current levels, according to FactSet.
For investors looking for broader exposure to the cybersecurity theme, analysts point to several exchange-traded funds. Joseph Rinaldi said he would be a "buyer" of the sector, recommending the First Trust NASDAQ Cybersecurity ETF (CIBR) and the Amplify Cybersecurity ETF (HACK).
Jeff Weniger, head of equity strategy at WisdomTree, whose firm runs the WisdomTree Cybersecurity Fund (WCBR), noted that enterprises are unlikely to outsource their core security to AI models. "The last expenditure to bring in-house with AI is cybersecurity," Weniger said.
This article is for informational purposes only and does not constitute investment advice.
