As we enter 2026, investor concerns about a potential bubble in the artificial intelligence (AI) sector are widespread. However, a bubble bursting is indeed happening, but not in AI stocks. This year, software stocks have experienced significant declines. As of February 25, the iShares Expanded Tech-Software Sector ETF (IGV), which tracks the software sector, has fallen 24% year-to-date. Major holdings in this ETF include Microsoft, Palantir, and Salesforce. Worries about the potential disruptive impact of AI technology have triggered a sell-off in high-valuation Software-as-a-Service (SaaS) stocks.
While some selling seems justifiable given the sector’s previously high valuations and the rapid evolution of AI tools like Claude Cowork, certain SaaS stocks may have been oversold. This article argues that two stocks, Figma (FIG) and Axon Enterprise (AXON), appear particularly attractive at current levels, especially following their latest earnings reports.
Design software company Figma has experienced a roller-coaster ride in the seven months since its IPO, currently trading 74% below its post-IPO peak. Its market capitalization stands at just $10 billion, half the price Adobe offered to acquire it for in 2022.
However, market concerns may be overblown. Figma is not only maintaining rapid expansion but has also achieved profitability under U.S. Generally Accepted Accounting Principles (GAAP). Its latest earnings report showed revenue growth accelerating to 40%, reaching $303.8 million, with a dollar-based net retention rate of 136%, indicating a 36% revenue increase from existing customers. The company is actively positioning itself in AI, with weekly active users for its AI products growing 70% quarter-over-quarter. Its close collaboration with AI company Anthropic suggests AI firms are more partners than competitors. The company forecasts first-quarter revenue growth of 38% and full-year adjusted operating profit between $100 million and $110 million. With its ability to gain market share from Adobe and a clear AI strategy, Figma possesses significant long-term growth potential.
Axon Enterprise, deeply entrenched in law enforcement technology, holds a strong position in its niche, known for TASER devices, body cameras, and related software. The company’s latest earnings report was robust, with revenue growing 39% to $797 million and adjusted profit rising 46%.
Axon is also actively investing in AI. It has launched Draft One, a generative AI tool that automatically creates initial reports from body camera footage. Its automated license plate recognition products and data integration platform continue to expand. The company projects reaching $8 billion in revenue by 2028, implying an average annual growth rate of roughly 30% over the next three years, firmly countering the narrative that AI will disrupt its business. While its valuation is not low, Axon’s strong competitive advantages position it well for rapid growth in the coming years.
