The software industry has undergone a dramatic reversal, shifting from a must-own sector to one investors are fleeing en masse as fears that artificial intelligence (AI) advancements will disrupt traditional business models.
Trading volume in the iShares Expanded Tech-Software Sector ETF (CBOE:IGV | CBOE Price Prediction) surged to near-record levels on Friday, with turnover approaching $11 billion, near the record $13.2 billion set on Feb. 6 and almost double the 2021 high of $5.8 billion. This panic selling has led to indiscriminate dumping of stocks — even those with solid fundamentals — as the sector lost over $1 trillion in market value in early February alone.
During this exodus, durable companies like Cloudflare (NYSE:NET) and Microsoft (NASDAQ:MSFT) are like babies being tossed out with the bathwater. They represent a significant buying opportunity as both are positioned to benefit from AI rather than succumb to it.
Cloudflare (NET)
Cloudflare shares declined 26% from their November highs, aligning with the broader software sector rout. The drop was exacerbated by a major network outage that month that disrupted access to platforms like X and ChatGPT, raising concerns about customer retention and operational reliability. Additionally, the stock faced pressure from stretched valuations, trading at 24 times current-year revenue prior to the selloff, as investors feared AI agents could commoditize edge computing services. Despite these headwinds, Cloudflare is poised to survive and thrive due to its integral role in supporting AI-driven workloads.
The company’s fourth-quarter results exceeded expectations, with revenue growth fueled by record annual contract values tied to AI demand, including a $130 million five-year deal and a $42.5 million annual contract. Cloudflare forecast 2026 sales between $2.79 billion and $2.80 billion, surpassing analyst estimates of $2.74 billion, driven by the rapid development of AI technologies that increase demand for its cloud services.
AI acts as a tailwind for Cloudflare by boosting traffic, applications, and security needs rather than disrupting its core infrastructure. The company’s globally distributed edge network provides low-latency, secure inferencing essential for AI agents like Anthropic‘s Claude Code and Cowork, positioning it as a “Tier 1 AI winner.”
A January report highlighted that organizations modernizing applications with Cloudflare’s tools are three times more likely to achieve AI return on investment, with 93% of leaders citing software updates as key to enhancing AI capabilities. Strategic partnerships with major AI firms and record DDoS mitigation further strengthen its competitive edge. High switching costs and enterprise integrations also provide a moat, while the proliferation of AI agents and IoT devices drives sustained demand for its zero-trust cybersecurity and connectivity solutions.
As AI re-platforms the internet, Cloudflare’s infrastructure becomes indispensable, supporting long-term revenue stability and customer retention.
Microsoft (MSFT)
Microsoft is down 18% year-to-date, with a sharp 12% drop following its fiscal second-quarter earnings report on Jan. 29. The decline stemmed from investor concerns over escalating capital expenditures, which reached $37.5 billion in the quarter as the company ramps up AI infrastructure investments. Operating margins dipped to 45.1% due to these costs, while Azure cloud growth remained stable at 37% to 38% but faced capacity constraints from AI chip shortages.
Its heavy reliance on OpenAI — accounting for 45% of Microsoft’s $625 billion remaining performance obligations — amplified the risks of over-dependence on a single partner while broader sector fears of AI disrupting software models contributed to the selloff. Microsoft is also the largest component of the iShares software ETF.
Yet Microsoft’s fundamentals position it to endure and expand in the AI era. Q2 revenue hit $81.3 billion, driven by Intelligent Cloud segment growth from enterprise migrations of legacy SQL and on-premise workloads to Azure. While AI spending pressures near-term margins, these migrations provide a stable revenue foundation, with Azure expected to maintain mid-30% growth.
The tech giant anticipates $27 billion to $29 billion in annual capital expenditures for data centers and AI chips, but this supports long-term scalability. The early monetization of tools like Copilot indicates the potential for productivity gains, with 2026 seen as an inflection year for AI returns.
Microsoft’s transition to an AI-first entity enhances its cloud dominance, with exploding AI adoption driving demand for secure infrastructure. The stock trades at a premium, but the diverse product lineup offers protection against disruption. As AI integrates across industries, Microsoft’s Azure and partnerships position it for sustained growth, outpacing sector peers in scale and innovation.
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