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Software stocks are roaring back. Some of the most interesting setups still have room to recover.

Salesforce (CRM) surged roughly 20% Thursday morning after earnings, while CrowdStrike (CRWD) jumped close to 20%.

The moves exemplify a software rally that has already flipped the script on beaten-down chip stocks. But leadership inside software has been changing almost as quickly.

Cybersecurity led the first leg off the June lows, faded badly in August, then came roaring back Thursday. Vertical software — companies that build tools for specific industries — has been less dramatic and more persistent.

Yahoo Finance analyzed 68 software stocks across six groups. The median vertical software stock has returned nearly 60% since June 22 and remained positive through each phase of the rebound.

Cyber has taken a wilder route. The group gained about 25% through mid-July, fell roughly 10%, rallied another 26%, then gave much of that back after August 13 before Thursday's rebound erased a big chunk of the damage.

That back-and-forth offers a useful lesson.

Cybersecurity had stopped leading before Thursday's big jump, but analysts were still raising sales expectations for several major companies. The business outlook hadn't broken just because the stocks had cooled.

That kept the group in play, as the First Trust Nasdaq Cybersecurity ETF (CIBR) pulled back toward its 50-day moving average, a widely watched technical level.

The flip side is showing up in some of Thursday's biggest winners.

Salesforce's earnings pushed analyst sales and profit estimates higher, strengthening what had already been a compelling cash-flow story. CrowdStrike also received fresh estimate upgrades.

But better news came with much higher prices.

Salesforce has now recovered roughly half of its prior decline. CrowdStrike is already back near its 52-week high.

That's why simply buying whichever software stock has the best earnings reaction can be a dangerous game.

The stronger setups tend to combine 1) persistent price strength, 2) improving sales expectations, 3) strong free cash flow, and 4) a price that still offers a favorable risk-reward.

Stock

Setup

AppFolio (APPF)

Strong rebound, positive sales revisions, roughly 24% free cash flow margin, still about 20% below its 52-week high.

Toast (TOST)

Revenue growth above 20%, positive revisions, roughly 2.4 times forward sales, still about 20% below its 52-week high.

Tyler Technologies (TYL)

Strong cash generation with considerably more recovery room, still roughly 35% below its high.

Adobe (ADBE)

Improving sales estimates, nearly 40% free-cash-flow margin, and a much lower valuation than premium software names.

None of these is an automatic buy.

AppFolio is a good example. The stock has recovered roughly half of its prior decline and has become overbought according to the relative strength index, or RSI, a momentum measure that compares the size of recent gains to recent losses.

Salesforce is in a similar spot after Thursday's jump.

That doesn't invalidate either comeback. It does argue against blindly chasing them. Investors can wait for momentum to cool, use nearby technical levels to define risk, and use stops if the rebound starts to fail.

The broader lesson is that software leadership doesn't move in a straight line. The better setup may come after a former winner cools off while fundamentals hold up — not after everyone piles back in.

Jared Blikre is the global markets and data editor for Yahoo Finance. Follow him on X at @SPYJared or email him at jaredblikre@yahooinc.com.

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