Citi Highlights Software Stocks Poised to Weather Any AI Shift

The software sector has recently taken a hit, with many names dropping at least 10% in the last month amid concerns about AI shaking up business models. However, Citi analysts see opportunity in this shakeout, pointing out that while valuations have been punished, earnings estimates for many companies have actually been revised higher for 2025 through 2027.

In their latest analysis, Citi screened about 90 software firms looking specifically for those with falling stock prices but rising consensus earnings per share estimates and a notable pullback in their implied terminal multiples. This approach aims to find stocks where the valuation risk has eased enough that any rebound is driven by fundamentals, not just investor sentiment.

The screening identified 22 software companies, with a strong lean toward those Citi rates as Buys. Among them are household names like Microsoft (NASDAQ:MSFT) and some more specialized players, including Dynatrace (NYSE:DT), Cloudflare (NYSE:NET), and Rubrik (NYSE:RBRK). They stand out as well-positioned across different possible AI market scenarios.

Additionally, firms like Palantir Technologies (NASDAQ:PLTR) make the cut as perceived relative winners if fears around AI disruption escalate. Citi's take is that the market is currently more worried about how AI could alter software business models long-term than about immediate earnings hits.

To put it bluntly, the analysts believe the market has already baked in a headline 10% cut to terminal multiples for S&P 500 Software & Services stocks, with only some of the room for a deeper 20% multiple contraction priced in. Given that, the implied growth expectations sitting on these software stocks don't look excessive-in fact, upward earnings revisions could meaningfully influence price action, especially relative to peers.

This is important because we're in a time when the broader software index is riding a volatile rollercoaster. Citi emphasizes that in this kind of environment, momentum in earnings revisions often makes the difference between winners and laggards. Stocks that manage to post positive revisions tend to draw renewed interest from the market, especially after a selloff.

While investors debate AI's long-term impact, these identified stocks are navigating near-term bumps better due to solid fundamentals underpinning their valuations. The interplay between AI hype, market sentiment, and financial results keeps the software sector intriguing and complex for those tracking earnings momentum.

One detail to watch: the sizable divergence between terminal multiples and forward P/E ratios suggests some skepticism remains priced in, meaning catalysts that confirm positive earnings trends could prompt notable moves. Citi's focus here is less about predicting AI winners and more about identifying stocks where valuation risk has come down sufficiently to let earnings revisions drive the narrative.

In a nutshell, the software space isn't just about AI buzz anymore-it's about earnings momentum, risk-adjusted multiples, and the fine line between disruption fear and opportunity recognition. Worth keeping an eye on these dynamics as the sector's story unfolds.