Topline
Software companies IBM and ServiceNow both beat Wall Street’s estimates in first quarter earnings Wednesday after market close, but both stocks plummeted—leading a broader selloff across software companies Thursday as fears about AI disruption persist.
Key Facts
ServiceNow tumbled 18% Thursday, after reporting first quarter revenue of $3.77 billion—up 22% year-over-year and topping the $3.75 billion estimate—and adjusted earnings of 97 cents per share versus 96 cents expected.
ServiceNow, which sells IT and management software to companies, also said ongoing tensions in the Middle East delayed some deals with government clients, contributing to the stock decline
IBM shares fell more than 9% Thursday after the company posted first-quarter revenue of $15.92 billion—up 9.5% year-over-year and topping the $15.71 billion consensus estimates—and adjusted earnings of $1.91 versus the $1.81 estimate.
Thursday’s losses are piling onto a historically rough year, with ServiceNow down more than 40% this year and IBM down 21%.
The selloff rippled across the sector Thursday, with stocks including Salesforce, Atlassian and Workday all down roughly 10%, as well as Adobe and Salesforce down 8%.
iShares’ Expanded Tech-Software Sector ETF, which includes more than 100 software stocks, is down 6% Thursday and has plunged 27% in the last six months as fears about AI replacing software applications have mounted.
In contrast, semiconductor manufacturer Texas Instruments stock jumped 17% Thursday after beating earnings expectations—in line with soaring investor enthusiasm for AI-related hardware stocks including chip manufacturers Nvidia and AMD, as well as data storage providers like Western Digital and SanDisk.
Key Background
Dubbed the “SaaSpocalypse” on Wall Street, the pessimism around software companies has only accelerated this year, as product developments and launches from AI model developers including Anthropic and OpenAI continue to spark fear about AI not only replacing human workers, but taking over the software applications that companies pay for. Companies that sell these software applications—some of which charge their subscription fees per employee—are facing threats to not only their revenue model as companies slash headcount but also their entire product, which could be replicated by AI. Last week, Figma, which sells design tools for websites and digital products, saw its stock drop 10% in one day after Anthropic released Claude Design, an AI-powered design tool that can turn text prompts into visual outputs without requiring design experience or a Figma license. Figma’s stock is down 11% today and has plummeted 54% this year. IBM was historically considered more insulated thanks to its consulting and hardware businesses, but the stock dropped 13% in a single day in February after Anthropic said AI could assist companies with modernizing a coding niche long dominated by IBM and render some of the company’s lucrative services no longer necessary. Intuit, the maker of TurboTax and QuickBooks, and human-resources software platform Workday are among some of the worst performers of the S&P 500 this year, with both stocks down roughly 40%.
Contra
The carnage has minted some unlikely contrarians. Michael Burry, the investor made famous by “The Big Short,” wrote in a Substack post that he expects a reversal in the “software massacre at the hands of an impossible AI narrative,” while Jefferies tech analyst Brent Thill argued the concept that AI tools are going to kill the entire industry is over-exaggerated. “The pendulum has swung too far in the negative towards the SaaSpocalypse right now. Valuations are depressed there—that will come back,” longtime tech investment banker Brandon Hightower told Forbes. Some software executives have pushed back publicly, too: Atlassian CEO Mike Cannon-Brookes told Bloomberg Television in February that “AI is one of the best things that’s ever happened to Atlassian and ever happened to my part of the software industry.” The market, so far, is not convinced. Atlassian’s stock is down 10% today and down 57% this year.
What To Watch For
Earnings season is in full swing with a wave of tech earnings expected in the coming weeks. Tech behemoths Alphabet, Microsoft, Amazon and Meta all report first quarter earnings next Wednesday, while enterprise software companies including Atlassian, Cloudflare and Datadog will report in the coming weeks. Investors will continue to keep eyes on earnings from software companies as they continue to post first-quarter results throughout May and June.
