Sales team (NYSE: CRM) Stocks fell on May 30, a day after weak guidance for the second quarter of 2025 was published. Salesforce and other top software stocks — from Adobe Unpleasant Business day, Atlassian, Snowflake, and others are hovering around their lowest levels so far this year. The sell-off of software application and infrastructure companies, which are part of the technology sector, may come as a surprise given the strength of the semiconductor industry.
Here’s what’s driving the software stock sell-off, why it’s a red flag for the broader market rally, and a simple exchange-traded fund (ETF) to consider if you want to buy the dip in the space.
Salesforce is slowing down
Salesforce is synonymous with growth. The software-as-a-service (SaaS) company achieved breakneck growth regardless of the market cycle. Over the past decade, Salesforce has transformed itself from a $5 billion annual revenue company to one with more than $30 billion in annual revenue, while improving profitability by increasing margins.
Even after the recent sell-off, Salesforce is the third most valuable software company Microsoft And Oracle. So when something unexpected happens in the company, the market listens.
Salesforce reported strong results and maintained full-year 2025 revenue guidance. However, it lowered its fiscal 2025 guidance for subscription and support revenue growth and generally accepted accounting principles (GAAP) operating margin.
Given the slowdown, analysts wondered why Salesforce didn’t simply lower revenue expectations and revise expectations, allowing the company to return to underpromising and overdelivering. But Salesforce seemed confident it would still hit its target despite the weak quarter ahead.
In the long term, Salesforce is extremely optimistic about the growth of artificial intelligence (AI) and its impact on its business. Salesforce CEO Marc Benioff said the following during his opening remarks on the earnings call:
But the one thing every enterprise needs to make AI work is their customer data, as well as the metadata describing the data, which provides the attributes and context the AI models need to generate accurate, relevant output. And customer data and metadata are the new gold for these enterprises, and Salesforce now controls, as I mentioned, 250 petabytes of this precious material. We have one of the largest and largest repositories of front office business data and metadata in the world. And every day, more companies are adopting Salesforce as their front office, bringing all their structured and unstructured data to our platform.
In short, Salesforce believes it can use AI to better run its business and that AI models will also rely on Salesforce tools and data – resulting in a win-win scenario.
That’s all well and good, but the short-term challenges are dire – hence the sharp sell-off. Chief Operating Officer Brian Millham said the following during his opening statement on the call: “We continue to see measured purchasing behavior similar to what we have experienced over the last two years and with the exception of the fourth quarter where we saw stronger bookings, momentum We saw this moderately in the fourth quarter in the first quarter. And we saw longer deal cycles, deal compression and high levels of fiscal control.”
In other words, Salesforce says its Q4 2024 results were one-offs and that the medium-term trend of slow growth continues. Sales growth in the second quarter is expected to be only 7% to 8% higher than in the same quarter last fiscal year. And the nominal growth of the current residual performance obligation (cRPO) is expected to be only 9%. Salesforce defines cRPO as the contracted revenue expected to be booked within the next twelve months. It’s basically the SaaS version of a backlog. High single-digit revenue growth and cRPO suggest that Salesforce is growing much slower than in recent years, which is why full-year expectations could be in jeopardy.
Cracks throughout the sector
Salesforce’s guidance and earnings commentary adds to the theme of slowing growth for many top software companies. Adobe sold off big in March when it reported weak near-term guidance. The company is investing heavily in AI and making some significant product improvements, but has not been able to meaningfully monetize AI enough to offset higher costs. Adobe’s situation is very similar to Salesforce’s. Both companies experience a lag between making AI investments and seeing those investments come to fruition.
Workday’s first-quarter 2024 earnings beat expectations, but guidance calls for slowing revenue growth due to a weak order book. The stock is now down more than 23% since the start of the year.
Atlassian is down more than 30% year to date despite strong growth and effective cost management. Valuation concerns, the departure of the co-CEO and growth in the cloud segment continue to put pressure on the stock.
Snowflake’s revenue has held up quite well, but its margins and revenue are riddled with cautionary tales. It also failed to manage its capital well, such as buying back its shares at what now appears to be a high price. The stock is down more than 25% year to date.
All told, many top software companies are facing a combination of growth and valuation issues, which were exacerbated by Thursday’s selloff in Salesforce stock.
An ETF to consider
With over $6 billion in net assets and an expense ratio of 0.41%, The iShares Comprehensive Tech-Software Sector ETF (NYSEMKT: IGV) is an excellent way to buy the dip in the software industry. The fund was founded during the crucible of the 2001 dotcom crisis, giving it a long track record in periods of market volatility.
Microsoft, Oracle, Salesforce, Adobe and Intuitive comprise 40.5% of the fund. In addition to these top holdings, the fund is well balanced across enterprise software companies and top cybersecurity leaders.
Some top cybersecurity companies like it CrowdStrike are hovering around record highs and have outperformed companies using enterprise software. The broad exposure to software application and infrastructure companies targeting different end markets makes the fund’s expense ratio well worth the price.
Despite the strength of Microsoft and Oracle, the ETF is broadly flat so far this year, showing the extent of the selloff in other software stocks.
Proceed with caution
While SaaS companies benefit from recurring revenue streams, their long-term growth depends on adding new customers and expanding spending from existing customers. Innovation is an important driver for retaining and expanding customers, but so is the economic cycle.
These SaaS companies’ customers cut across the economy, making SaaS companies particularly vulnerable to the ripple effects of a broader slowdown. Guidance from Salesforce and other companies shows that customers are keeping their spending tight and conscious of their costs – which is a theme worth watching for the health of the broader market rally.
The investment thesis of many of these companies has not changed, but their valuations are based on continued growth, which means volatility could persist if there is a prolonged slowdown. Investors with a three- to five-year time horizon and a high risk tolerance may want to consider the iShares Expanded Tech software Sector ETF as a comprehensive way to invest in software while gaining diversification benefits.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Adobe, Atlassian, CrowdStrike, Intuit, Microsoft, Oracle, Salesforce, Snowflake, and Workday. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
My best ETF to buy the dip in slumping software stocks like Salesforce was originally published by The Motley Fool
