Software Sector Gains on M&A Hopes and Strong Fundamentals
The software sector is finding support from merger and acquisition (M&A) speculation, but fundamentals and AI-related sentiment will ultimately determine its performance. Recent deal talk has provided a valuation floor, with Truist noting that reported discussions involving Silver Lake to take a company private at around 15x free cash flow (FCF) could set a benchmark for takeovers. European software peers rallied in sympathy on August 14, 2026.
Truist has identified an 'A list' of potential targets, including Commvault, Elastic, Five9, GitLab, HubSpot, UiPath, Varonis, and Zeta Global, along with a 'B list' of other candidates. Strategic buyers are also active, with reports of talks for Listen Labs at about $2 billion following a $3.6 billion deal for Fin in June 2026. On September 14, 2026, the sector rallied as AI-disruption fears eased and takeover premiums boosted shares. Workday’s $4 billion buyback and upcoming analyst day on October 13, 2026, suggest management is pushing for independence.
Fundamentally, the sector appears cheap but not broken. A snapshot of U.S. software and IT services names above $10 billion market cap shows low forward price-to-earnings (P/E) multiples, double-digit revenue growth, and significant one-year drawdowns. Investors have priced in AI disruption, making cash-generative businesses attractive targets for private equity.
Workday (WDAY) is a key stock to watch, with a forward P/E of 16.4x and fair value upside of 35.4%. Its revenue and levered FCF have grown substantially over five fiscal years. However, part of its price may already reflect a takeover premium. Salesforce (CRM), with a forward P/E of 13.8x and strong FCF, is seen as a lower-risk alternative and a potential acquirer rather than a target.