Undervalued Tech Stocks 2026

You want software stocks to grow, not go nowhere. Felix Prehn spotted a two-year gap where software dropped 8% while the NASDAQ surged 70%. So what happens when $24 billion in short bets meets a market ready to turn?

Undervalued Tech Stocks 2026

Key Takeaways

• Software stocks are down while the NASDAQ is up 70%. Hedge funds profited $24 billion from wagering against the sector.
• Short positioning in software is one-sided, with far more money pushing down than up.
• The rubber band effect explains how extreme crowding builds pressure for a sharp reversal.
• XSW holds 136 software companies and is near a breakout point at $160.
• CoreWeave partners with Nvidia and has long-term contracts fueling AI infrastructure demand.
• Unity Software is down about 87% from its highs and dominates the game development tools market.
• BigBear AI builds software for the US military and federal agencies with contracts in a growing defense AI budget.
• Forced buying from short sellers closing positions can drive prices up fast, sometimes in weeks.

Software Stocks Are Down While the NASDAQ Is Up 70%

Over the last two years, the NASDAQ 100 climbed roughly 70%. A $10,000 investment in 2024 would be worth about $17,000 today.

Software stocks told a different story. The biggest software companies in America declined about 8%. A $10,000 investment would be worth roughly $9,000.

How can software fall while everything else rises? Felix Prehn points to one answer. Hedge funds made $24 billion wagering software stocks would go down. When billions of dollars push in one direction, prices follow.

A simple story drives the short trade. AI will replace software companies because AI can do the same work cheaper. Hedge funds decided to profit from the panic.

Short Positioning in Software Is One-Sided

Professional investors track something called positioning. It shows how many people wager a stock will rise versus how many push the price down.

Normally, positioning stays fairly balanced. Some money bets up, some wagers down.

In software right now, the ratio is extreme. Short selling is at levels not seen in years. Far more money is pushing down on software than up.

What does extreme positioning tell you? Everyone who wanted to wager against software has already placed the bet. When one side of the trade gets maxed out, pressure builds in the opposite direction.

The Rubber Band Effect Builds Pressure for a Sharp Reversal

Felix Prehn calls the framework behind the software gap the rubber band effect. Stretch a rubber band far enough and tension builds. Eventually the force becomes too much and the band snaps back harder.

The stock market works the same way. When everyone crowds on one side of a wager, they stretch the band. Software stocks are stretched about as far as Felix has seen in years.

Professional investors watch for the snap. They measure how crowded the positioning is. They look for the first crack in price resistance and for forced purchases.

XSW Holds 136 Software Companies Near a Breakout Point

The simplest way to play undervalued tech stocks is through an index fund. Felix Prehn examines XSW, a major software ETF holding 136 companies.

XSW is down about 7% over the last year. The price has done nothing for months. A pattern is forming on the chart near $160, where the price hit three highs. A move above $160 triggers a breakout signal.

When a stock or ETF clears a resistance level, a signal forms. If the squeeze happens, the whole ETF rises. If not, an index fund probably will not drop as hard as a single name. Money spread over 136 companies spreads the risk.

Here are Some Undervalued Tech Stocks 2026

• Core Weave
• Unity Software
• Big Bear

CoreWeave Partners With Nvidia and Rides AI Infrastructure Demand

CoreWeave is not a typical cloud provider like Microsoft or Amazon. The company builds a massive network of data centers packed with the most powerful GPUs. Felix Prehn compares the service to premium fuel at the petrol station.

The bull case is simple. AI computing demand is growing faster than almost anyone expected. CoreWeave has long-term contracts, a massive backlog, and a partnership with Nvidia.

On the chart, the stock has broken slightly above recent highs. Felix notes a cleaner breakout would come around $140. The big selloff appears to be over based on the price action. Single-stock risk remains, so position sizing and exit timing matter.

Unity Software Is Down 87% and Dominates Game Development Tools

Millions of developers use Unity Software to build video games, simulations, and AR experiences. Felix Prehn describes the company as dominating the creator tools market.

The stock is down about 87% from highs. Felix says he quite likes setups where a stock has been punished heavily. The gaming industry is not shrinking. People still play games, and the space is evolving into virtual worlds.

Unity Vector, a new AI tool, helps games and apps make money more efficiently. On the chart, Unity appears to have bottomed around $17.50. The price held the same level in 2025 and 2026 and formed a base.

BigBear AI Wins Defense Contracts in a Growing AI Budget

BigBear AI builds software for the US military and federal agencies. The stock is down about 70% from all-time highs.

Felix Prehn says he is cautious about companies putting AI in the name. But the bull case here is specific. The US government is pushing hard to add AI into national security. Defense budgets for AI are growing fast.

BigBear AI has been winning key contracts with a real government backlog. On the chart, the stock appears to bottom around $3 and is moving up. Felix warns sellers who bought at higher prices will create resistance on the way up.

Forced Buying From Short Sellers Can Drive Prices Up Fast

The final piece of the rubber band effect is forced buying. Felix Prehn calls the process the scariest part and the source of real speed.

When the price starts rising, short sellers face a problem. The only way to close a short position is to buy the stock back. When many rush to close at the same time, a wave of buying hits the market. The rubber band snaps.

Felix gives the example of Avis, the car rental company. A boring stock heavily shorted by investors. When the price started climbing, forced purchases sent Avis up hundreds of percent. Felix warns the move can happen in weeks, not months.

Felix Prehn’s Tips and Insights

• Wall Street no longer buys stocks for quality, profits, or management. All the pros care about now is momentum. Money moves from sector to sector faster than ever.
• The buy-and-hold strategy probably still works for the S&P 500 in the long run. The approach does not work for individual stocks or sector ETFs.
• Nokia was the leading phone company. Then BlackBerry took over for business. The two are pretty much gone now. Money flows in, leaves, and finds somewhere better.
• Microsoft still has millions of subscribers despite AI fears. Nobody canceled an Office subscription because a free alternative existed. Companies find it painful to switch software providers.
• When short positioning reaches extreme levels, everyone who wanted to wager against the sector has already done so. Very little room remains for more selling pressure.
• Position sizing, exit timing, and understanding how a stock fits into a portfolio all matter. No single stock should be treated as a guaranteed win.
• Felix made about 60% on oil stocks he purchased six months before the Iran war started. He credits watching where big money was moving.

Frequently Asked Questions

What are undervalued stocks and how do investors identify them?

Undervalued stocks are shares trading below what the company is worth. Investors spot them through metrics like P/E ratio, price/cash flow, and comparisons to past performance. Several metrics combined with a look at the business itself help separate cheap companies from truly mispriced ones. Positive operating cash flow is a key sign to avoid pre-revenue tech bets. Return on equity and debt ratios show how healthy the business is. A clean balance sheet confirms the company can survive a downturn. One metric may show fair value while another shows a discount. Several data points together reduce the chance of overpaying.

Why is software considered one of the best undervalued stocks to buy in 2026?

Software stocks dropped about 8% while the NASDAQ rose 70%. Hedge funds made $24 billion wagering against the sector. Software is one of the top growth sub-sectors in 2026 after sell-offs linked to AI fears. The technology sector is projected to lead earnings growth at about 37%. Industry trends confirm artificial intelligence is expanding demand for tech companies, not replacing them. Revenue in the sector is picking up speed. Profit margins are widening for several software names heading into the second half of the year.

Are software stocks good growth stocks for long term growth potential?

Growth stocks are companies expected to increase revenue and earnings faster than the market average. Undervalued technology stocks are projected to recover in 2026, driven by rising profit margins and solid revenue expansion. SaaS companies changing revenue models can see temporary losses despite good long-term forecasts. A Forward PEG Ratio below 1.0 signals high expected earnings growth at a discount. Names with high growth potential require a focus on margins and cash generation.

How does market volatility affect the stock price of undervalued tech stocks?

Market volatility creates wider price swings and pushes stocks below real value. Economic cycles and sector performance heavily influence valuations. Technology stocks lagged the broad market during the first quarter of 2026. Felix Prehn explains the rubber band effect builds pressure during volatile periods. The snap back can send prices higher fast. Over the past two years, volatility turned profitable companies into cheap stocks.

What valuation metrics help when evaluating stocks in the technology sector?

Common metrics include P/E ratio, price/cash flow, and a stock’s trading price relative to future prospects. Technology companies tend to trade at higher P/E ratios due to expected growth. Undervalued tech stocks tend to have low sales and earnings multiples. The gap between current market price and future cash flow points to a possible mismatch. Profit margins and net margins show how well a company runs. Analysts flag names as top picks when margins expand faster than the market expects.

What is XSW and why do some investors consider it among the best tech stocks?

XSW is a software ETF holding 136 US stocks in the technology sector. Felix Prehn notes XSW is near a breakout at $160. A move above resistance could signal the start of a broader rally. An index fund also offers protection against the downside risk of any individual name. The ETF includes mid caps and cloud computing companies alongside larger names. XSW gives exposure to widening margins in the software sector.

Why is Unity Software considered undervalued despite being down 87% from highs?

Unity dominates the game development tools market. Millions of developers use the platform. The current stock price reflects heavy selling, not a collapse in business performance. High switching costs give Unity real value overlooked in current market prices. Unity Vector, a new AI tool, is designed to improve margins through better ad revenue. Revenue is returning as the gaming market expands. The stock formed a base at $17.50 in 2025 and 2026. Felix Prehn sees early signs of a potential rally.

How does forced buying from short sellers create upside in undervalued tech stocks?

Short sellers borrow shares and sell them. They expect the stock price to drop. When the price rises instead, short sellers must purchase shares back to close positions. Felix Prehn explains the forced buying creates automatic demand. The Avis example shows how a stock can rise hundreds of percent in weeks. The move can compress months of gains into days.

What role does AI infrastructure spending play in undervalued tech stocks?

Big cloud companies like Google, Amazon, and Microsoft plan to spend $725 billion on infrastructure. The spending raises concerns about short-term margins but fuels demand for companies like CoreWeave. AI infrastructure is a major driver behind projected recovery in undervalued technology stocks for 2026. The chip industry benefits directly. Companies like Advanced Micro Devices and Applied Materials supply the chips and equipment behind AI computing. Revenue and margin growth in the chip supply chain back up the recovery case.

What examples outside the technology sector show upside in undervalued stocks?

Allstate has a projected upside of about 4.9% over the next year. Revenue grew 5.6% and adjusted net income rose 83.7% for 2025. Ryanair has an analyst price target showing more than 25.8% upside. The airline reported 9% revenue growth in the third quarter of fiscal year 2026. Genpact has an analyst price target pointing to 36% potential gain. Revenue grew 6.6% overall with a 17% increase in AI-driven solutions. The financial sector also holds undervalued names with consistent dividend payments and solid market positions.

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Video published on 13th May, 2026

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