Software stocks have experienced significant volatility over the past few weeks, following a steep sell-off sparked by disappointing earnings reports from major players like Microsoft and ServiceNow. Concerns about potential disruptions from emerging AI tools, particularly Anthropic’s introduction of Claude Cowork—capable of generating customizable software solutions—have further fueled investor anxiety.
Despite numerous software stocks seeing sharp declines from their peaks, not all are recommended purchases at this juncture. A careful analysis reveals one promising software-as-a-service (SaaS) stock worth buying, while another appears to be best avoided.
A Closer Look at Axon Enterprise
Among the stocks that stand out is Axon Enterprise, which has been a significant contender in the market for more than a decade. Known for its innovative blend of hardware and software tailored for law enforcement agencies, Axon has seen its stock tumble approximately 50% from its six-month peak and down 25% in just the last two weeks.
What differentiates Axon from typical software companies is its integrated approach. Beyond hardware like TASER weapons and body cameras, Axon developed a software ecosystem that enhances its product offerings. Its recent foray into generative AI with Draft One—a tool designed to assist in writing police reports—exemplifies its commitment to innovation.
As of today, Axon’s stock trades at around $446.97, showing a gain of 3.04% recently. The company, with a market cap of $35 billion, has shown impressive revenue growth projections—expected to rise by 31% to $2.74 billion in 2025. While its price-to-sales ratio sits at a premium of 14, many analysts believe this is justifiable given Axon’s strong competitive positioning and potential for future growth.
Axon’s customer base primarily consists of state and local law enforcement agencies, insulating it somewhat from the broader challenges facing the software sector. Unlike many businesses that might cut budgets in uncertain times, law enforcement agencies have consistent funding and a need for reliable technology, creating a stable revenue stream for Axon.
Challenges Faced by Atlassian
In contrast, Atlassian, known for its collaboration and ticket-management software solutions such as Jira and Trello, presents a more precarious investment. While the company has enjoyed steady revenue growth—reporting a 23% increase to $1.6 billion in its latest quarter—it has encountered a sharp stock price drop of 72% over the past year, largely attributed to fears related to AI advancements.
With over 350,000 customers, including 80% of Fortune 500 companies, Atlassian has a vast market presence. However, the recent discourse around AI has led businesses to consider alternative solutions. For instance, Klarna’s CEO recently announced that their company would be abandoning Atlassian in favor of a self-developed system, underscoring the competitive pressures facing the firm.
Atlassian’s stock trades around $92.92, with a market cap of $24 billion. While it may seem like an attractive option after its sell-off, several factors suggest otherwise. The company has struggled with profitability—even as it generated nearly $6 billion in annual revenue, it has failed to report positive earnings on a GAAP basis for the last decade. Much of its apparent profitability has been obscured by large expenditures on share-based compensation, which significantly dilutes shareholder value.
The rapid evolution of AI technologies could pose serious threats to Atlassian’s product lines, leading to additional pressure in a market that requires constant innovation. Consequently, while the stock might appear appealing, the inherent risks associated with Atlassian’s business model render it a candidate best avoided.
In summary, while Axon Enterprise presents a robust opportunity for investors with its unique business framework and potential for growth, Atlassian’s vulnerabilities in a rapidly changing technological landscape highlight the importance of cautious investment strategies in the software sector.
