8 Profitable Software Stocks with Durable Moats Trading at a Discount

The current market dislocation in software presents a classic value opportunity. The sector has fallen sharply, with the iShares Expanded Tech-Software Sector ETF now down about 21% from its recent high, pushing it into bear-market territory. This selloff, driven by fears that artificial intelligence could upend traditional business models, has created a wide gap between price and intrinsic value for many companies. For the disciplined investor, this volatility is noise; the real story is the shift in the valuation paradigm.

The market has decisively moved from rewarding mere growth to demanding cash flow and sustainable margins. As one analysis notes, public pricing now rewards cash flow, sustainable margins, and efficient growth. This is a return to a more fundamental approach, where profitability matters as much as the top line. The danger for investors is mistaking high growth without profitability for a bargain-a classic value trap. The key is to assess growth and profitability in context, as emphasized by the principle that before thinking a software company is expensive or inexpensive, we note the importance of putting the growth and profitability into context.

This environment offers a margin of safety. When sentiment turns sharply negative, even quality companies can be sold at depressed prices. The current fear-driven sell-off appears to be pricing in a permanent erosion of long-term revenue potential for incumbent software vendors, a scenario that may be overstated. For companies with durable competitive advantages and a clear path to profitable growth, the current price may offer a more attractive entry point. The value investor's task is to separate the temporary noise of AI fears from the long-term compounding power of a business with a wide moat.

The 8 Picks: Profitable Moats at a Discount

The search for value in software requires focusing on companies where durable competitive advantages are being overlooked. The following eight stocks meet the criteria: they are profitable, possess wide or deep economic moats, and trade at significant discounts to their estimated intrinsic value. This list draws from Morningstar's recent screening of undervalued tech stocks and other value-focused analyses.

1. Adobe (ADBE): Trading at a price/fair value ratio of 0.52, Adobe is the most discounted stock on Morningstar's list. Its wide economic moat is built on dominance in content creation software, with Photoshop and Illustrator as cornerstones of the Creative Cloud. The company's moat is deepened by its recent AI integration, like the Firefly platform, which aims to extend its ecosystem. The current price implies a 48% discount to Morningstar's fair value estimate.

2. Tyler Technologies (TYL): Also on Morningstar's list, Tyler Technologies trades at a price/fair value ratio of 0.56. The company holds a wide moat by providing essential software to government agencies for services like court management, property tax collection, and public safety. This recurring, mission-critical software creates high switching costs and predictable revenue, a hallmark of a durable business.

3. ServiceNow (NOW): A key player in workflow automation, ServiceNow trades at a roughly 45% discount from its January 2025 peak. Its wide moat stems from being the dominant platform for digital workflow, creating a powerful network effect where each new application adds value to the entire ecosystem. The current price reflects a sharp selloff, but the underlying business model remains intact.

4. SAP (SAP): Another Morningstar pick, SAP trades at a price/fair value ratio of 0.60. The enterprise software giant maintains a wide moat through its entrenched position in corporate resource planning (ERP) and business applications. Its scale and deep integration with large organizations create formidable barriers to entry, even as the market grapples with AI's long-term impact.

5. Progress Software (PRGS): This stock presents a deep value opportunity with a 269.1% fair value upside potential and a modest 7.9x forward P/E ratio. Progress has a wide moat in application development and data management software, serving a loyal enterprise customer base. Its recent strong quarterly results and low valuation suggest the market is pricing in a permanent slowdown that may not materialize.

6. Five9 (FIVN): Five9 offers a different kind of value proposition, with a 1785.9% EPS growth forecast and a low PEG ratio. The company holds a wide moat in cloud contact center software, where its platform creates high switching costs for customers. The stock's discount reflects high expectations for its AI-driven growth, but the valuation leaves room for error.

1. Broadridge Financial Solutions (BR): A defensive pick on Morningstar's list, Broadridge trades at a price/fair value ratio of 0.57. Its wide moat is built on providing critical financial infrastructure services, including proxy voting and communications for public companies. This essential, recurring revenue stream is less susceptible to cyclical downturns, offering stability at a discount.

2. Enphase Energy (ENPH): While often grouped with solar, Enphase is a software-driven hardware company with a wide moat in residential energy management. It trades at a 39.1% fair value upside and faces a 262.7% EPS growth forecast. The company's moat comes from its integrated hardware-software platform, which creates a sticky ecosystem for homeowners. The current price reflects a challenging cycle, but the long-term competitive position remains strong.

Valuation and Margin of Safety Analysis

The core of value investing is buying a dollar for fifty cents. For the software picks listed, the market appears to be offering a significant discount, but the key question is whether the margin of safety is wide enough to absorb uncertainty and still deliver a satisfactory return over the long term. The evidence points to a clear gap between current price and intrinsic value for several companies.

A critical benchmark is the enterprise value to next twelve months (NTM) sales multiple. In today's market, public multiples for software firms typically range from 2.6x to 3.1x. This sets a floor for what investors are willing to pay for a dollar of future sales. The stocks on our list trade well below this range, suggesting the market is pricing in a higher risk of permanent impairment to their revenue streams. This is the margin of safety in action.

Specific valuation metrics underscore this discount. Progress Software (PRGS) exemplifies deep value, trading at a modest 7.9x forward P/E ratio with a staggering 269.1% fair value upside potential. Adobe (ADBE) is the most discounted on Morningstar's list, with a price/fair value ratio of 0.52-meaning the stock trades at a 48% discount to the analyst's estimate of its intrinsic worth. These numbers are not just low; they imply a profound skepticism about the future, which may be misplaced for companies with durable advantages.

The durability of these advantages is captured by the Morningstar Economic Moat Rating. A wide moat rating suggests the company can fight off competitors for at least 20 years. This is the critical durability factor for a margin of safety. It means the business model is not easily replicable, and the competitive position is robust enough to protect pricing power and cash flows through market cycles and technological shifts. For a value investor, this long-term defensive moat is more important than short-term earnings volatility.

The bottom line is that these valuations offer a tangible buffer. When a company with a wide moat trades at a price that implies a 48% discount to its estimated value, the risk of permanent capital loss is reduced. The market's fear-driven selloff has created a setup where the potential reward, if the company's long-term competitive position holds, could be substantial. The margin of safety is not guaranteed, but it is present and significant for these specific names.

Catalysts and Risks for the Thesis

The value opportunity hinges on a single, critical question: is the market's deep discount a temporary mispricing of quality, or the start of a permanent erosion of economic moats? The forward view must monitor clear signals that will confirm or contradict this thesis.

The primary catalyst for the value case is evidence that established software companies are successfully navigating the AI transition. Watch for signs of pricing power and margin expansion in their new AI-adjacent products and services. A company like Adobe, with its wide economic moat and recent AI integration, must demonstrate that its ecosystem can command premium pricing even as new tools emerge. Similarly, a company like Progress Software, trading at a modest 7.9x forward P/E ratio, needs to show its enterprise customers are willing to pay for enhanced capabilities, proving its moat is not being eroded. The structural shift in software economics, driven by AI, means that the old playbook of predictable recurring revenue is ending. The catalyst is a company's ability to rewrite that playbook profitably.

The counter-catalyst, and the core risk, is the validation of the disruption thesis. The market is pricing in a profound shift where mid-market enterprise software companies would face an unprecedented squeeze from both AI-native startups and tech behemoths. The key risk is mistaking a temporary valuation compression for a permanent loss of economic moat-a classic value trap. This is the danger of buying a dollar for fifty cents when the dollar itself is being devalued. The evidence to watch for is not just weak quarterly results, but a clear pattern of market share loss to agile, AI-native competitors that are reimagining business software from the ground up. If this trend accelerates, the wide moats of the incumbents may prove narrower than assumed.

For the disciplined investor, the setup is one of high conviction in durable advantages against a backdrop of industry-wide uncertainty. The margin of safety provided by current prices offers a buffer, but it is not a guarantee. The path forward requires active monitoring for two distinct signals: the first, positive, is a company demonstrating resilience and pricing power in the new AI landscape; the second, negative, is evidence of a structural, irreversible shift that undermines the very foundation of its competitive advantage. The thesis wins if the former occurs; it loses if the latter is validated.