The best time to buy stocks is when prices are low. But this is easier said than done – when stocks fall, it’s usually because investors are somehow worried about the underlying business.

This is currently the case with software stocks. With valuation multiples at levels that investors could only dream of over the last decade, I believe there are some real opportunities to consider.

What is the risk?

The problem with software today is that artificial intelligence (AI) is increasing competition. The danger is that this could force existing companies to compete on price, reducing margins.

The best thing about these companies is their ability to keep prices rising. But if that becomes threatened, their shares will be worth much less than investors thought six months ago.

Importantly, current software leaders are not defenseless. From a customer’s perspective, switching suppliers is complicated, hard and risky, so the savings must be worth it.

Software stocks have been falling steadily lately. However, I don’t think the threat is the same across all companies, which means there are potentially huge opportunities to consider right now.

Sage Group

FTSE100 business Sage Group (LSE:SGE) provides accounting software for medium-sized businesses. The company’s shares are down 37% over the last 12 months, which suggests a huge challenge – and it is.

Anthropic has launched agent plug-ins that threaten to do much of what the company’s core product does. This is an obvious risk, but investors should pay attention to a few things.

First, the products are not all the same – the Sage Trust Label means that the company is willing to support its software products by meeting industry compliance standards. Anthropic doesn’t do this.

Another is that Sage subscriptions make up about 1% of the average customer’s budget. This makes switching a lot of time and effort, and a lot of risk with little potential savings.

Guidewire software

Guidewire software (NYSE:GWRE) and I have a story – I bought the stock in 2022, sold it in 2023 and regretted it since then. But it’s 50% below the highs, so maybe I’ll get another chance.

The company provides software for the insurance industry and has been systematically acquiring carriers for several years. And the reason it takes so long may actually work to his advantage.

The insurance industry is experiencing a slowdown. However, this may work to Guidewire’s advantage – it has never lost a customer to competitors because they usually don’t change unless they have to.

As a result, the chance to buy shares after a acute sell-off can be a huge opportunity. So I’ll definitely be taking a closer look at my portfolio over the next few weeks.

Time to act?

It’s straightforward to talk about greed when others are fearful, or to buy high-quality stocks at bargain prices. But the reality is that it is often harder than it seems.

Taking advantage of opportunities involves being willing to think about making a purchase when there seems to be a threat on the horizon – often an existential one.

This is currently the case with Sage Group and Guidewire Software. However, I believe investors should treat today’s prices as an opportunity to consider buying at extremely attractive valuations.