AI Could Spell Trouble for Software. These Experts Say to Avoid One Stock In Particular

Software was once the hottest industry on Wall Street. Not so in the AI era.

S&P 500 software stocks lagged the broader index for the second consecutive year in 2025 as companies making the “picks and shovels” of the AI buildout—like semiconductors and memory devices—led the stock market higher. And analysts expect the challenges weighing on software stocks, especially application developers, to persist in 2026.

One example: Oppenheimer on Tuesday downgraded Adobe (ADBE) stock to “Perform” from “Outperform” and withdrew its price target entirely, citing threats from AI that apply to varying degrees across the application software industry. The news pulled Adobe, shares of which have lost more than a fifth of their value over the past 12 months, down more than 5% on Tuesday.

One of the primary issues Adobe faces, according to Oppenheimer, is the perception that AI is weakening its competitive position. Gen AI “is increasing the velocity of content creation while lowering price and subscriber growth,” wrote analysts led by Brian Schwartz. The company faces new competition from LLM providers like OpenAI and advertising platforms like Meta, which have introduced creative tools that allow people other options for doing what previously required an Adobe license and specialized knowledge. 

Investors also worry that generative AI could upend the seat-based pricing model on which many software-as-a-service providers like Adobe are built. Traditionally, Adobe sells a client a set number of Creative Cloud licenses for a set amount of time, which has meant reliable revenue. It and other software companies will have to adapt if the usage-based pricing—in which a customer pays each time they use a service—favored by AI developers and hyperscalers becomes the norm. 

Even if seat-based models remain standard, AI threatens to undercut software subscription growth by helping companies to get by with smaller teams and lowering the cost of switching vendors, according to a recent Deutsche Bank note. 

AI isn’t seen as a threat to all software companies. Infrastructure software stocks performed well last year as companies accelerated IT modernization and cloud migration efforts as they sought to transition to more AI usage, according to Deutsche Bank.

Shares of data analytics software provider Palantir (PLTR) more than doubled in value last year as its commercial sales soared. Cloud migrations also helped support shares of companies like MongoDB (MDB) and Snowflake (SNOW).

Morgan Stanley analysts expect many of the trends that fueled last year’s infrastructure software rally to carry into 2026. They argue the rollout of AI copilots and agents should support demand for data management and observability tools, as should robust cloud growth.

Cloud and AI spending are expected to remain top priorities for companies this year. Cloud spending growth is expected to hold steady at 10%, according to a Jefferies survey of IT executives and chief investment officers. That survey also found that, on average, nearly 12% of IT budgets will be dedicated to AI this year, up from 6.5% last year.

Adobe’s stock is down more than 50% since peaking in 2021. About half of the analysts with current ratings tracked by Visible Alpha rate Adobe stock a “Buy,” while two are neutral and three recommend selling. The average price target near $392 represents 26% upside from Tuesday’s close.