Software Stocks in the age of Government Efficiency: Opportunities and Challenges
A new era of government efficiency is dawning in the United States, and while some software companies are feeling the pinch, others are poised to thrive. The key lies in understanding which companies offer solutions that align with the goals of a leaner, more productive federal workforce.
The Federal Efficiency Push: A Double-Edged Sword
The U.S. government’s renewed focus on efficiency, spearheaded by initiatives like the “Department of Governmental Efficiency” [[3]] established in January 2025 [[2]], presents both challenges and opportunities for the software sector. On one hand,potential government cutbacks and fears of a broader recession have contributed to a sell-off in software stocks. Many companies rely on “seat licenses,” where revenue is directly tied to the number of government employees using their software. Layoffs within federal agencies could translate to fewer licenses purchased,impacting revenue streams.
Several prominent software stocks have experienced declines in 2025:
- ServiceNow Inc.(NOW): Down 21%
- Salesforce Inc. (CRM): down 16%
- Adobe Inc. (ADBE): Down 11%
- iShares Expanded Tech software ETF (IGV): Down 6%
Though,this initial downturn might potentially be a temporary setback. as agencies adapt to a smaller workforce, they will likely seek out software solutions that boost productivity and streamline operations. This shift could create notable opportunities for companies offering the right tools.
Bernstein’s Viewpoint: Identifying the Winners
Analysts at Bernstein suggest that investors should carefully consider which software companies are best positioned to benefit from this new landscape. While not all companies are created equal, several stand out as potential winners.
ServiceNow (NOW): The “Next Microsoft”?
ServiceNow, which derives an estimated 8% to 9% of its revenue from U.S. federal customers,is especially exposed to the initial impact of government layoffs. However, Bernstein analysts believe this is a short-term issue.They argue that as agencies adjust to fewer employees, they will increasingly rely on productivity software like ServiceNow to maintain efficiency.The analysts see long-term potential, stating, “Long term we continue to think this is the ‘next Microsoft,'” and adding, “If you can deal with short-term volatility we encourage owning it now (picking the bottom might be hard).” ServiceNow’s current stock price may represent a “rare ‘discount'” for investors willing to weather the storm.
Adobe (ADBE): Waiting for Sentiment to Shift
Bernstein also expresses a favorable view of Adobe, although they acknowledge that positive sentiment toward the company may take time to materialize.Concerns about competition and recent changes to the company’s reporting structure have created uncertainty among investors. As Bernstein analysts noted,”Investors are skittish due to concerns about small and large competitors and the company has created confusion by changing the reporting structure without giving lots of past data to help investors understand what is happening.” Meeting or exceeding expectations for AI annual recurring revenue and demonstrating “stable” revenue growth could help turn the tide.Adobe’s CFO recently signaled confidence in the company’s prospects with a rare purchase of stock.
Cybersecurity Plays: Palo Alto Networks (PANW) and Zscaler (ZS)
cybersecurity companies like palo Alto Networks and Zscaler are also viewed favorably. “Cybersecurity, while frequently enough seat-based, has a more limited federal exposure,” according to Bernstein. Palo Alto Networks is expected to benefit from easier comparisons in the coming months, while Zscaler stands to gain from recent changes to its sales strategy. Zscaler has outperformed Palo Alto Networks year-to-date, with its stock up 17% compared to Palo Alto Networks’ slight gain.
Salesforce (CRM): A More Cautious Outlook
Bernstein is more cautious about Salesforce, rating the stock as “underperform.” while the company’s Agentforce AI product has generated excitement, Bernstein analysts believe that “agentic AI is still early days and even if the product is massively triumphant it might very well be years before it is indeed a big enough driver of growth.” Moreover, organic revenue growth for Salesforce’s overall business is slowing down.
The Broader Implications for the Software Industry
The U.S. government’s efficiency drive is not an isolated event. It reflects a broader trend toward optimizing resources and leveraging technology to achieve greater productivity. This trend is likely to continue, creating both challenges and opportunities for software companies across various sectors.
Key Takeaways for Investors:
- Focus on companies offering solutions that directly address the need for increased efficiency and productivity.
- Consider the potential impact of government cutbacks on companies with significant federal exposure.
- Look for companies with strong growth potential in areas like cybersecurity and AI.
- Be prepared for short-term volatility as the market adjusts to the new landscape.
the software industry is constantly evolving, and the current focus on government efficiency is just one factor shaping its future. By carefully analyzing the trends and identifying the companies best positioned to adapt, investors can capitalize on the opportunities that lie ahead.
The Federal Source Code policy and Open Source Software
The federal government’s commitment to efficiency extends beyond simply reducing its workforce. it also includes promoting the reuse and public accessibility of custom-developed federal source code. The Federal Source Code Policy, outlined in the Office of Management and Budget (OMB) Memorandum M-16-21, aims to achieve efficiency, transparency, and innovation through reusable and open-source software [[1]]. This policy encourages federal agencies to release custom-developed code as open source, allowing other agencies and the public to benefit from it. This initiative could lead to significant cost savings and accelerate innovation across the government.
The policy’s key objectives include:
- Promoting the reuse of existing code to avoid redundant progress efforts.
- Increasing transparency by making government-developed code publicly available.
- Fostering innovation by allowing external developers to contribute to and improve government software.
By embracing open-source principles, the federal government aims to create a more efficient, clear, and innovative technology ecosystem.
Software Stocks in the Efficiency Era: A Deep Dive with Cybersecurity & AI Analyst, Dr. Evelyn Hayes
Senior Editor (SE): Dr. Hayes, welcome! The government’s push for efficiency is shaking up the software industry. Is this just a temporary blip, or a sign of a more significant shift in how software companies will thrive?
Dr. Evelyn Hayes (EH): Thanks for having me! It’s far more than a blip. We’re witnessing a fundamental restructuring driven by both cost-cutting and a strategic shift toward productivity. The companies that understand and adapt to what the government truly needs—solutions that optimize resources while enhancing efficiency—are the ones that will prosper in this new era.
SE: Let’s dive deeper into the companies mentioned. ServiceNow seems to be in a potentially precarious position despite Bernstein’s long-term optimism. Can you elaborate on why it’s facing headwinds?
EH: Absolutely. ServiceNow,along with other seat-license-based companies,is indeed feeling the immediate impact of potential government cutbacks. Fewer federal employees, potentially fewer seat licenses purchased. That’s direct impact. However, Bernstein is spot on. Long-term, ServiceNow and similar companies provide essential, modern solutions, and as of this, their value will be apparent.
SE: Adobe is another company mentioned, and Bernstein seems to have a cautiously optimistic outlook. What factors contribute to the uncertainty surrounding Adobe?
EH: Adobe’s situation is complex. There are competing considerations.The market is volatile. Its competition has intensified, and change in reporting structures raises questions. To turn sentiment around, the company needs to demonstrate consistent revenue from its AI-driven products and overall revenue growth; in short, prove the new business model works.
SE: Cybersecurity stocks like Palo Alto Networks and Zscaler are viewed favorably. What makes thes companies well-positioned for growth in this surroundings?
EH: cybersecurity is inherently positioned for growth because it is crucial, no matter the economic climate. With a smaller workforce, securing what remains will become even more essential. Both Palo Alto and Zscaler offer cutting-edge solutions. Zscaler’s recent sales strategy changes and Palo Alto’s expected easier comparisons position them favorably. Government agencies must protect their digital assets, and that’s a consistent need.
SE: Salesforce receives a more cautious outlook from Bernstein. Why is that?
EH: Bernstein’s cautiousness towards salesforce stems mainly from two factors. First, while their agentforce AI product is exciting, true impact will take time to materialize and to have a substantial impact on revenue growth. Secondly, there is softening organic revenue growth for the overall Salesforce business. The focus is now on long-term sustainability and market dominance.
SE: Let’s talk about the Federal Source Code Policy and open-source software. How will this policy impact the software industry?
EH: This is huge. The Federal Source Code Policy is a game-changer. When custom code is released as open source, the government reduces redundant development, increases transparency, and fosters innovation. This not only creates efficiency by allowing other agencies to reuse code but also invites external developers to contribute,leading to more robust and innovative solutions and cost savings. It will challenge customary software development models.
SE: How can investors navigate the software market during this period of change? What should they be looking for?
EH: Investors need to adopt a strategic approach. Here is a guide:
Prioritize Productivity and Efficiency: Look for companies with solutions that directly address the goals of streamlined operations and increased productivity within government agencies. These are the must-haves.
Assess Federal Exposure: Understand how much a company relies on federal contracts. Companies with less exposure might weather short-term volatility more easily.
Look towards the future: Cybersecurity and AI are key. Identify companies that are investing and innovating in these areas, which offer sustained growth.
Prepare for Swings: The market will adjust. Be prepared for short-term volatility, especially in the early stages as agencies reorganize.
Due Diligence is Always Crucial: Be smart. Research companies and assess the potential impact of the current landscape.
SE: What are the broader implications of this shift toward government efficiency for the software industry as a whole?
EH: The government’s focus on efficiency represents a wider conversion. It’s a trend towards optimization, resource leverage, and technology deployment to improve productivity. This influences how commercial software is developed and how companies are valued, affecting growth plans. The sector needs to be ready to change.
SE: Thank you, Dr. Hayes. Your insights have been invaluable.
EH: My pleasure!
SE: the government’s push for efficiency presents both challenges and opportunities for the software industry. Which of these factors should investors consider most when making investment decisions?* Let us know your thoughts in the comments below!
