Software sector outlook: M&A hopes, cheap valuations, and rising free cash flow

Software sector M&A hopes and cheap valuations are driving interest, but rising free cash flow will ultimately determine share price movements. While investors have priced in AI disruption, making cash-generative businesses attractive, no deal is guaranteed. The industry is trading at low multiples with double-digit growth and large one-year drawdowns.

Workday (WDAY), valued at $188.27 with a market cap of $44.86B and a forward P/E of 16.4x, shows a 35.4% upside potential. Salesforce (CRM), priced at $229.22, boasts a forward P/E of 13.8x and $14.4B in free cash flow, having grown from $5.28B. However, Salesforce's own deal activity may put downward pressure on its shares. Analysts view M&A as a catalyst, not a thesis, and the next key test is Workday's Oct 13 analyst day.