Software Stocks at a Crossroads: AI Disruption, Undervaluation, and Strategic Entry Points

The software industry stands at a pivotal moment. Artificial intelligence (AI) has reshaped expectations for productivity and innovation, but the market's reaction has been uneven. While some companies face unjustified pessimism, others are being unfairly penalized for short-term challenges. For contrarian value investors, this divergence presents an opportunity: strong performers like ServiceNow and Adobe are trading at compelling valuations despite robust growth, while weaker names like Asana and Q2 Holdings (QTWO) remain overvalued despite poor unit economics.

The Oversold Giants: ServiceNow and Adobe

ServiceNow (NOW) and Adobe (ADBE) exemplify the paradox of undervaluation amid strong fundamentals. ServiceNow, a leader in digital workflow automation, trades at a trailing P/E ratio of 92.22 and a P/S ratio of 15 as of December 2025. These multiples, while high by traditional standards, mask the company's underlying strength. Its trailing twelve months (TTM) revenue reached $10.984 billion, with a 21.5% year-over-year growth rate in Q3 2025. EBITDA of $2.5 billion and a gross profit margin of 78.05% underscore its profitability. Yet, the market appears to be discounting ServiceNow's AI-driven innovations, such as its Now Platform enhancements, which are driving demand in enterprise workflows.

Adobe, meanwhile, faces margin pressures but remains a cash-cow with a 30% profit margin and a P/S ratio of 6.24. Its TTM revenue of $23.769 billion grew 10.53% year-over-year, though KeyBanc analysts note flat net-new annual recurring revenue (ARR) guidance and contracting EBIT margins. These challenges, however, are being overcorrected in the stock price. Adobe's gross profit margin of 89.3% and dominant position in creative and document software suggest its long-term value is being overlooked.

The Weak Links: Asana and QTWO

Contrast this with Asana (ASAN) and QTWO, where poor unit economics and weak growth justify caution. Asana, despite a 9.9% revenue increase in Q2 2025, trades at a P/S ratio of 4.27 and an EV/EBITDA of -16.7x. The company's GAAP operating loss of $266.7 million in fiscal 2025 and a -28.33% profit margin highlight structural challenges. While its 97% dollar-based net retention rate for Core customers is encouraging, the lack of positive EBITDA and a P/E ratio of 0.00 suggest the market is not rewarding its operational improvements.

QTWO, a collaboration software provider, fares no better. Its P/S ratio of 5.81 and EV/EBITDA of 80.56 indicate a premium valuation relative to its 4.12% profit margin. Despite reporting record Q3 2025 results, QTWO's unit economics remain unproven, with no clear path to sustainable margins. For value investors, these metrics signal a high-risk proposition.

Strategic Entry Points and the Contrarian Case

The disconnect between fundamentals and valuations creates asymmetric opportunities. ServiceNow and Adobe, though expensive on paper, are trading at discounts to their historical multiples and growth trajectories. ServiceNow's P/S ratio of 14.11 and Adobe's EV/EBITDA of 15.58 are below their respective industry medians, suggesting the market is underestimating their AI-driven tailwinds. Conversely, Asana and QTWO's valuations are inflated relative to their earnings power and growth rates.

For investors, the key is to differentiate between temporary AI-related volatility and structural weaknesses. ServiceNow's 20% full-year subscription revenue guidance and Adobe's entrenched market position in creative tools offer durable moats. Meanwhile, Asana's negative EBITDA and QTWO's lack of margin expansion warrant skepticism.

Conclusion

The software sector's crossroads present a classic contrarian scenario. While AI fears have oversold leaders like ServiceNow and Adobe, weaker names like Asana and QTWO remain overvalued despite poor unit economics. For value investors, the path forward lies in capitalizing on the former's undervaluation while avoiding the latter's speculative risks. As the dust settles on AI hype, fundamentals-not fear-will determine long-term winners.