"Some of the best returns in the stock market have come from software stocks. These tech companies can scale to serve more customers while enjoying annual recurring revenue models. Not only do new customers enter subscription plans, but existing customers may have to upgrade to more expensive plans as their needs change. While some software stocks are better positioned than others, these three picks seem ready to produce outsized returns for patient investors."
"Cloud revenue increased by 26% year-over-year, while Microsoft's overall revenue jumped by 18% year-over-year in Q1 FY26. The tech giant also generates revenue from software products like Microsoft 365, Xbox, and LinkedIn. However, the company's AI investments remain the largest long-term opportunity that can help it outperform the stock market. Microsoft's Copilot is accelerating the adoption of Microsoft Office, and its cloud platform serves as the digital infrastructure for many AI apps."
"ServiceNow ( NYSE:NOW) helps businesses create AI workflows and agentic AI for customer support. The stock is down by almost 40% over the past year, but that poor performance doesn't align with ServiceNow's strong financial growth. The company delivered 22% year-over-year revenue growth in Q3 2025 while exceeding all topline growth and profitability metrics. It's always a good sign when a company beats guidance, and ServiceNow's annual recurring revenue model implies that additional wins are on the way."
Software companies with scalable products and annual recurring revenue can grow by adding new subscriptions and upselling existing customers. Microsoft derives over 60% of revenue from Azure, with cloud revenue rising 26% and overall revenue up 18% year-over-year in Q1 FY26. Microsoft's AI initiatives, including Copilot, are accelerating Office adoption and positioning Azure as infrastructure for AI applications. ServiceNow builds AI workflows and agentic AI for customer support, delivered 22% revenue growth in Q3 2025, beat topline and profitability metrics, and serves more than 8,400 customers including over 85% of the Fortune 500, supporting predictable future growth.
Read at 24/7 Wall St.
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