It’s rare to see US tech stocks selling cheap, but investors are concerned about artificial intelligence (AI) disruption. And in some cases, that might be a big opportunity.

Positioning

According to the latest data from Bank of America, fund managers have been shifting away from US equities in general – and tech in particular. And it’s easy to see why.

Source: HedgeFund Tips

With high margins and strong recurring revenues, software companies have been investor favourites. But there are real concerns about the threat of disruption from agentic AI.

The magnitude is real. If an AI agent can do the work of several humans without the need for a user interface, a lot of the value that software businesses add – and charge for – goes away.

As a result, investors are starting to see the high valuation multiples these stocks trade at as a risk. But while the selling has been largely indiscriminate, not all stocks are the same.

Defensibility 

One of the big defences the incumbents have is switching costs. While consumers might change their shampoo in any given month, it’s a different story for business software.

Moving to a different setup involves retraining staff, hiring specialists to manage the migration, and disrupting ongoing work. So it’s not something they do often or easily.

They often will do it, though, if there’s a big enough benefit – such as a huge long-term cost saving. Importantly, though, the value equation can vary significantly from one industry to another.

One sector where inertia is higher than most is local government, where regulatory barriers are high and risks matter more than profits. That’s usually a bad thing, but it might not be in this case.

A stock to consider

Step forward Tyler Technologies (NYSE:TYL). The share price is down 50% in the last 12 months, making it one of the worst-performing S&P 500 stocks over the last year.

The firm’s latest earnings report came in below expectations and guidance was weaker than investors had hoped for. But the company is the leader in software for local governments.

That doesn’t reduce the risk of AI disruption to zero. And even if the threat of losing customers to new entrants is relatively low, higher competition for new business is an ongoing threat. 

Management expects revenue growth for 2026 to fall to between 8% and 10%. But a forward price-to-earnings (P/E) ratio of 22 is the lowest multiple the stock has traded at in a decade.

Government software

I’ve been avoiding shares in Tyler Technologies in recent years. The stock has typically traded at high multiples in an industry that’s been slow to shift from analogue systems to digital ones. 

In the last few months, though, the equation has changed completely. The share price has come down significantly and the inertia looks like it might provide much more of a defensive boost.

As a result, I think the stock is worth considering for anyone looking to add to an ISA before the April deadline. The AI threat is real, but it’s likely to be greater for some companies than others.

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I won’t keep you in suspense: my answer’s ‘no’. Investors really need to think carefully about competition right now, but I think some companies are still very well-positioned.

Barriers to entry

There’s no way around the fact that AI can now write software code, so investors need to look for businesses that are protected by other barriers to entry. 

One of the best examples is operating in an industry that has specific regulatory requirements. In these situations, existing companies can’t easily be replaced by AI-generated alternatives. There are a few S&P 500 names that fit the bill. One is life sciences software firm Veeva (NYSE:VEEV) and another is government-focused Tyler Technologies (NYSE:TYL).

In both cases, there are risks. But I think competing with these companies is harder than just writing the kind of software that can easily be generated by something like GPT-5.

Veeva

Veeva focuses on providing software for life sciences companies. Its products help with clinical trials, regulatory compliance, and quality management.

Targeting one sector specifically can be risky. And this is especially true of healthcare which has been facing its own challenges from the current US administration.

In terms of AI disruption though, the barrier to entry isn’t just the ability to write software. It includes domain expertise and validated systems in an industry where mistakes can be costly.

This makes setting up a competing operation more difficult than it would be with something less specialised. And I think it gives the firm better protection from generative AI competitors.

Tyler Technologies

Tyler Technologies doesn’t have proprietary data protecting it. But being a software provider for US state and local governments makes it unusually difficult to compete with.

Suppliers for governments need to meet strict security standards and have to be approved as vendors. And getting this is difficult, complicated, and time-consuming for new competitors.

There’s always a risk of public budgets tightening in a weaker macroeconomic environment. And with Tyler Technologies trading at some big multiples, this is something to be aware of.

In terms of the risk of AI disruption though, I don’t think the firm’s position has weakened significantly. The regulatory requirements still look like a big challenge for competitors, to me.

Software moats

For software companies where the main barrier to entry is producing the product, AI that can write code looks like a real threat. This however, isn’t the same across the industry.

I think Veeva and Tyler Technologies both have better protection that comes from specific expertise in a regulated industry. So I’m keeping my eye on these in case they start falling.

The one that has surprised me so far is Axon. The firm’s vertically integrated into policing and law enforcement and that looks to me like a strong competitive advantage. 

Axon’s stock-based compensation costs put me off the company at the moment. But I do think it could be a name that could develop into an interesting long-term opportunity.

The post As software stocks get slaughtered are these S&P 500 names next to crash? appeared first on The Twelfth Magpie.

Adobe

The first stock on my list of growth stocks to buy in March is Adobe (NASDAQ:ADBE). The company provides software on a subscription basis. Its gross margins are huge at over 80% and its net margins are in excess of 30%. The company’s balance sheet is strong, with interest payments on debt accounting for less than 2% of operating income. Lastly, the fact that it is the industry standard makes it extremely difficult for users to switch to different software, meaning the company has a huge economic moat. 

Over the last five years, the company has averaged revenue growth of over 20%. This is impressive, but if it shows signs of slowing, I suspect that the stock will fall as a result. I think, however, that Adobe’s competitive advantages will persist, and that this will prove to be a great growth stock for me to buy in March. 

Experian

The second growth stock I’m looking at this month is Experian (LSE:EXPN). The company provides credit information to lenders to help them make decisions about who to offer loans to. Like Adobe, the company has a huge competitive advantage. It has a huge database that is almost impossible for a competitor to regulate. Moreover, it provides a service that it is very difficult for its customers to live without.

The risk with Experian comes from the company’s negative working capital model. Experian regularly operates with current liabilities in advance of its current assets. This can limit the company’s financial flexibility. As a result, Experian’s share count has fluctuated in recent years. But the fluctuations have been minor and I think that Experian’s advantages are enduring. This means that Experian is a growth stock that I’d look to buy in March.

Tyler Technologies

The last company on my list of growth stocks to buy in March is Tyler Technologies (NYSE:TYL). This one might be less well-known than Adobe or Experian, but I think it might be a nice under-the-radar investment opportunity for me.

Tyler Technologies provides software platforms to government organisations. This facilitates things like paying water bills or filing court documents. Like Adobe, Tyler Technologies enjoys high gross margins. Unlike Adobe, Tyler Technologies operates in a niche where the competition is almost non-existent and the company has plenty of scope for expansion. 

Shares in Tyler Technologies come with a hefty price tag. The stock is not cheap and there is some significant growth already priced in. The lack of competitors, however, means that Tyler Technologies has a relatively clear path to growing its business for the foreseeable future, so I think that the risk of underperformance is somewhat limited.

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