The Quiet Ascent: AI and the Fortunes of Software

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The currents of the market, as they always do, reveal the anxieties and aspirations of men. Lately, a disquiet has settled upon the realm of software, a hesitation reflected in the performance of the S&P North American Technology Software Index. That index, a measure of the fortunes of one hundred and eleven enterprises, has lagged behind the broader S&P 500 (^GSPC +0.55%) by a margin of nineteen percentage points in the past year. This is not merely a correction, but a symptom. A disquietude born of the belief that the very foundations of established order are shifting. It is a decline not seen since the trials of 2022, a year that tested the resilience of all who trade in the hopes of future prosperity.

For a decade past, software has enjoyed a period of relative calm, a steady climb fueled by the insatiable demands of a world increasingly reliant on digital artifice. But now, a new force is at play: Artificial Intelligence. Not as a tool to enhance existing endeavors, but as a potential usurper. Investors, those ever-watchful sentinels of capital, fear that AI will dismantle the established order, rendering many a once-profitable enterprise obsolete. It is a fear not entirely without merit, for progress, like a relentless tide, washes away the old to make way for the new. Yet, to succumb to panic is to forfeit opportunity.

There are those, however, who see not disruption, but expansion. Analysts at Morgan Stanley, men attuned to the subtle rhythms of commerce, posit that the productivity unleashed by AI will not diminish demand, but rather amplify it. They foresee a surge in the ranks of developers, a blossoming of new applications, and a wave of modernization sweeping through the existing infrastructure. It is a vision of renewal, a belief that the challenges of today will pave the way for the triumphs of tomorrow. And in this context, the recent underperformance of software stocks presents a rare opportunity, a moment for the discerning investor to acquire value before the tide turns.

Two enterprises, in particular, warrant careful consideration: AppLovin (APP 2.07%) and Atlassian (TEAM +4.93%). They are not merely purveyors of software, but architects of adaptation, poised to thrive in this new era.

AppLovin: A Wager on the Evolving Marketplace

AppLovin, a company whose name speaks to the art of persuasion, develops ad technology—the subtle mechanisms by which desires are awakened and consumptions encouraged. Initially focused on the realm of mobile gaming, where fortunes are won and lost with each tap of a screen, they have expanded their reach into the broader landscape of e-commerce. This expansion is not haphazard, but guided by a clear vision: to create a self-service platform that streamlines the onboarding process and ultimately automates every aspect of the advertising workflow.

AppLovin distinguishes itself in two crucial ways. First, they base their revenue on performance—on the actual results achieved—rather than simply taking a percentage of ad spending. This is a subtle but significant distinction, a reflection of their commitment to demonstrable value. Second, their recommendation engine, Axon, powered by the enigmatic forces of Artificial Intelligence, outperforms the targeting tools of their competitors.

Indeed, analyst Mark Giarelli of Morningstar, a man accustomed to dissecting the intricacies of commerce, notes that Axon has been central to AppLovin’s success. He claims that AppLovin delivers a 45% higher return on ad spending than Meta Platforms] and an astounding 115% higher return compared to platforms like TikTok, Pinterest, Snapchat [by Snap], and YouTube. These numbers are not mere statistics, but a testament to the power of intelligent targeting.

Wall Street anticipates that AppLovin’s earnings will increase at a rate of 58% annually through 2027. This growth, while ambitious, appears reasonable given the current valuation of 66 times earnings, particularly considering that the company has consistently exceeded expectations in recent quarters, surpassing consensus estimates by an average of 21%.

Among thirty-two analysts, the median target price for AppLovin stands at $774.50 per share, implying a potential upside of 45% from its current price of $533. For the patient investor, willing to embrace a calculated risk, a small position today may prove to be a prudent investment.

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Atlassian: Forging Connections in a Fragmented World

Atlassian, a name evoking the mythical figure who bore the weight of the world, develops work management and collaboration software. Their tools are designed to facilitate the complex endeavors of development and operations (DevOps) teams, as well as the more subtle tasks of marketing and human resources. They also provide IT service management software, essential for maintaining the smooth functioning of modern enterprises. Consultancy Gartner has recognized Atlassian as a leader in these crucial domains.

Atlassian distinguishes itself through its unwavering commitment to research and development, investing more than its peers in the pursuit of innovation. This investment is not driven by short-term profits, but by a long-term vision of self-service sales and the power of word-of-mouth marketing. Furthermore, Atlassian is unique in its ability to connect technical, non-technical, and IT service teams on a common platform. This fosters collaboration, unlocks synergies, and provides numerous opportunities to upsell existing customers.

Recently, Atlassian introduced Rovo, a suite of generative AI features designed to enhance productivity and efficiency. These tools support intelligent search, automate complex processes, and even generate code, promising to streamline workflows and unlock new levels of innovation. As a well-established vendor in multiple product categories, Atlassian is poised to benefit significantly from the unfolding AI boom.

Wall Street expects Atlassian’s earnings to increase at a rate of 22% annually through the fiscal year ending in June 2027. This growth, while substantial, appears reasonable given the current valuation of 31 times earnings, particularly considering that the company has consistently exceeded expectations in recent quarters, surpassing consensus estimates by an average of 16%.

Among thirty-four analysts, the median target price for Atlassian stands at $225 per share, implying a potential upside of 84% from its current price of $122. With shares trading 62% below their previous high, investors have a rare opportunity to acquire a position at a favorable price.

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2026-01-23 12:02