Enterprises Are Spending 15% More on Software in 2026, Thanks to AI. Here's How to Profit.

Industry Overview - Software stocks are facing challenges as investors are concerned about the impact of artificial intelligence (AI) on the industry, with new AI agents capable of performing tasks independently and writing code, which may increase competition for established companies [1] - Despite these concerns, enterprise spending on software is projected to grow, with Gartner forecasting a 15% increase to $1.4 trillion this year [2] Microsoft - Microsoft continues to grow its revenue in the productivity segment despite facing competition from free, open-source alternatives [4] - The launch of Copilot features has led to a 17% year-over-year increase in Microsoft 365 commercial cloud revenue, indicating that customers are finding more value in Microsoft's offerings [5] - Microsoft Azure's revenue surged by 39% year over year, supported by the introduction of the Maia 200 AI chip aimed at reducing compute costs for AI workloads [6] - Microsoft has a market capitalization of $2.9 trillion and generated $160 billion in cash flow over the past year, providing a strong financial position to invest in AI and innovation [8] - The stock trades at approximately 24 times forward earnings, with analysts expecting around 14% annualized earnings growth, presenting an attractive P/E-to-growth ratio [9] ServiceNow - ServiceNow, which automates various business tasks, generates nearly all its revenue from subscriptions, leading to consistent growth in revenue and free cash flow [10] - Despite a 33% decline in stock price year to date due to fears of AI competition, ServiceNow's subscription revenue increased by 21% year over year, slightly below its three-year average growth rate [11] - Management reported accelerating new business deals and substantial growth in licensed users, guiding for a 20.5% to 21% year-over-year increase in subscription revenue for full-year 2026 [13] - ServiceNow is actively shaping the future of AI technology, with CEO Bill McDermott emphasizing the company's role in creating an "AI control tower for business reinvention" [14] - The stock's forward P/E has decreased to about 25, making it attractive for a company with strong growth guidance [15]