When high-quality software stocks sell off, long-term investors tend to start paying attention.
Over the past year, sentiment toward technology shares has deteriorated sharply. Rising rates, concerns about artificial intelligence disrupting traditional software models, and multiple compression have all weighed heavily on valuations.
Two of the ASX's best-known software names, Xero Ltd (ASX: XRO) and TechnologyOne Ltd (ASX: TNE), have both been caught up in the pullback.
Xero shares are down roughly 58% over the past 12 months, while TechnologyOne has fallen around 32% over the same period.
So which one looks like the better buy right now?
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The case for TechnologyOne shares
TechnologyOne has quietly become one of the most consistent software businesses on the ASX.
It provides mission-critical enterprise software to governments, universities, and large organisations. Over recent years, its transition to a software-as-a-service model has transformed the business. Recurring revenue has risen, cash generation has strengthened, and earnings visibility has improved materially.
Management has laid out an ambitious target to double the size of the business roughly every five years. With growing momentum in the UK and a highly sticky customer base, that goal does not look unrealistic.
For investors seeking stability and steady execution, TechnologyOne remains a compelling long-term compounder.
The case for Xero shares
Xero, meanwhile, operates in a larger and more competitive global market.
It provides cloud accounting software to small and medium-sized businesses and has built strong positions in Australia, New Zealand, and the UK. The long-term opportunity remains significant as more businesses transition from legacy accounting systems to cloud-based platforms.
The sharp share price decline reflects concerns that AI could lower barriers to entry in accounting software or pressure pricing. However, Xero's platform is deeply embedded in customer workflows, with extensive integrations and ecosystem partnerships that are not easily replicated overnight.
Importantly, much of that risk now appears reflected in the valuation after the 58% sell-off.
Which one wins?
Both ASX stocks remain high-quality software businesses with strong recurring revenue models and long growth runways.
TechnologyOne arguably offers the smoother ride, with a more concentrated customer base and a long history of disciplined execution. But its smaller share price decline suggests investors are still willing to pay a premium for that consistency.
Xero, on the other hand, has seen far more valuation compression. While risk remains, the larger pullback means expectations are significantly lower. If the company can continue delivering subscriber growth and margin expansion, the rebound potential could be greater.
