Jefferies favors these four software stocks after restructuring the application software sector

2026-02-24 01:27:20

Investing.com - After the overall performance of the application software sector lagged significantly, Jefferies conducted a fresh review of the space. Based on more sustainable business models and internal AI application developments, the firm is optimistic about a select group of stocks.

Application software stocks have noticeably underperformed the broader software sector, with many declining approximately 30-55% year-to-date, while the IGV ETF (NYSE:IGV) has only fallen 24%. Against this backdrop, Jefferies analysts led by Brent Thill stated that they are “reassessing the current levels by integrating our new AI risk matrix and the fundamentals/catalysts of individual stocks.”

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The team has re-evaluated its coverage using multiple AI risk dimensions, including client portfolios, platform positioning, data advantages, and pricing models. Analysts warn that the market faces “further risks of AI disruption,” prompting a more selective stance within the sector.

As part of the reset, Jefferies downgraded several stocks—Workday (NASDAQ:WDAY), DocuSign (NASDAQ:DOCU), Monday.com (NASDAQ:MNDY), and Freshworks (NASDAQ:FRSH)—to hold ratings due to ongoing risks and weaker market sentiment, but emphasized that software remains structurally resilient.

The analysts stated, “Software will survive—enterprise intellectual property is embedded within it.”

Within this revamped framework, Jefferies identified four stocks it considers best suited for AI transformation, including Intuit (NASDAQ:INTU), Procore Technologies (NYSE:PCOR), Atlassian (NASDAQ:TEAM), and Salesforce (NYSE:CRM).

The firm describes Intuit as its “top large-cap stock in the application software space,” citing its use of 80 different AI model variants applied to over 40 years of data, covering approximately 100 million customers. The analysts note that the company has a “large user base and data moat” within its AI risk framework, supporting confidence in its AI transformation capabilities.

Procore is highlighted as “an attractive mid-cap vertical story, with revenue re-acceleration expected as macro conditions ease.” Jefferies’ broader review emphasizes the importance of vertical positioning and platform depth, which the firm believes help Procore stand out as the market re-evaluates AI disruption risks.

Atlassian is seen as benefiting from rising demand for AI-generated code and IT collaboration tools, with analysts noting “more AI-generated code = more IT collaboration needs.” They also describe it as “the fastest-growing application software company, with catalysts for over 20% mid-term growth.”

Finally, Jefferies considers Salesforce “the most capable application software vendor to implement AI agents,” adding that “success will lead to overall acceleration.”

The analysts further stated, “We believe CRM’s highly customized workflows and its vast footprint as an enterprise record system make it difficult to replace.”

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