Software Industry Outlook: Growth Drivers, Risks, and Opportunities

Software is truly everywhere in the modern world, from streamlining workflows to making phone calls to following navigation routes in a car. With a projected annual growth rate of 11% through 2030, the industry continues to thrive—fueled by trends like generative artificial intelligence, cloud adoption, and automation.

For asset managers, understanding the drivers shaping software companies can help inform investment decisions. Our 2026 Software Landscape report examines the industry’s competitive advantages, the evolution of the SaaS business model, the impact of AI, and more.

Software vendors have historically enjoyed moats based on switching costs. Once an application is installed, employees become proficient in the software and the client builds business processes around it. Changing software applications can involve significant time and expense to retrain employees, reimagine business processes, and rebuild connections between applications. This process may be disruptive and even compromise customer data.

However, AI advancements could challenge this dynamic. In March 2026, our analysts reviewed our Morningstar Economic Moat Ratings for 132 software, services, and data provider firms to assess this risk. As a result, we downgraded moat ratings for 40 companies and raised our uncertainty ratings for 27. The most heavily affected areas were enterprise software and IT services, as we think uncertainty is simply too high to maintain our original moat ratings.

Still, AI doesn’t appear to be an immediate threat to software models. In some cases, we’re unsure about the excess returns beyond 10 years, while in others, we believe there may be more serious moat erosion altogether.

Since its introduction in 2000, the SaaS model has become the most pervasive software delivery mechanism. This is mainly because SaaS delivers better customer service via continuous, rapid updates that are instantly available to all users. SaaS also offers superior economics through lower upfront costs over time due to a more consistent and valuable revenue stream.

Still, concerns increased in late 2025 that AI could disrupt the SaaS model. We expect hybrid models to become common over time, with a combination of a seat license and consumption pricing for AI use.

Software has grown substantially, and despite uncertainty, we believe the future remains bright. In fact, we expect double-digit growth for the software market over the next five years, growing at 11% annually through 2030—including approximately 13% in 2026.

• AI: We see demand for generative AI use cases fueling software growth, offset by potential disruption. This is the key controversy in software today.

• Public cloud: The rise of the public cloud has driven heavy software investment across industries. Companies take on the expertise of hybrid or cloud-native software firms to support the transition from on-premises to cloud.
• Data: The exponential growth in data and need for storage will only multiply. Software firms have the expertise to organize, protect, and use this data.
• Digital transformation: Accelerated by the pandemic, there’s a push for firms to implement digital workflows.

• Higher interest rates: Higher interest rates make it more expensive to fund growth as a software firm and can also lead to leaner budgets for customers.
• Economic downturn: Customers are tightening their IT budgets in tough macroeconomic times or with macro factors like foreign-exchange pressures.
• Privacy concerns: A reluctance to onboard software or digitize workflows due to data privacy concerns hampered SaaS and public cloud growth early on.
• Regulation: Regulatory intrusion is one of the most significant risks.

The software industry continues to benefit from growth drivers such as cloud adoption and ongoing digital transformation. At the same time, AI is introducing both opportunities and uncertainty, raising questions around competitive advantages and long-term profitability. When asset managers understand these trends, it can be easier to evaluate software companies and identify potential opportunities.

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