Software stocks took a beating this week after two major players—Fortinet and ServiceNow—delivered results that disappointed investors. The sharp declines revived a nagging question across the tech sector: how quickly will artificial intelligence reshape the way software companies make money?
Fortinet, a cybersecurity firm, saw its shares plunge 26% to a five-month low after reporting slower product revenue growth and cutting its full-year service revenue forecast. ServiceNow, an enterprise software company, followed with a 23% drop—on track for its biggest one-day decline on record—after missing quarterly profit expectations. Even though ServiceNow raised its full-year subscription revenue outlook, analysts at Raymond James pointed to softer subscription revenue and backlog growth, noting that AI initiatives are “yet to materialize.”
Why the selloff spread
For years, software companies have been prized for their subscription-based sales, which generate steady, predictable cash flow over long periods. That model has made them favorites among growth investors. But when confidence in future growth wobbles, investors often become less willing to pay a premium for each dollar of future profit.
That dynamic appears to be playing out now. Reuters noted that the S&P 500 Software & Services Index is up only 5% so far this year, less than half the broader S&P 500’s gain. The gap highlights how cautious investors have become about the sector, even as the overall market has climbed.
The selling wasn’t confined to the two companies that reported. Names like Salesforce, Palo Alto Networks, Atlassian, and Zscaler all fell in sympathy, reflecting how tightly software stocks trade as a group. When one major player stumbles, investors often reassess the entire sector, especially when the underlying worry is a broad technological shift like AI.
A valuation reset, not just a bad quarter
The moves in Fortinet and ServiceNow signal more than just disappointing earnings—they point to a potential valuation reset. Software valuations often rely on cash flows expected far in the future. When investors demand a higher equity risk premium—the extra return they require for holding stocks—those future dollars are discounted more heavily, and valuation multiples can shrink quickly.
That’s why weakness can spread so easily. If investors start to believe that AI could disrupt the traditional software playbook—perhaps by enabling customers to do more with less, or by shifting spending toward AI-native tools—they may be less willing to pay rich prices for current software leaders.
Bank of America Global Research downgraded Fortinet, and Reuters reported that many other brokerages lowered their price targets on the stock. Such moves from Wall Street analysts often reinforce the selling pressure, as investors adjust their expectations for the companies’ growth trajectories.
What it means for investors
For everyday investors, the key takeaway is that software stocks are in a period of heightened uncertainty. The sector’s traditional strengths—recurring revenue, high margins, and long-term contracts—are being weighed against the potential for AI to upend those advantages.
Until there’s clearer evidence of which companies will benefit from AI and which will be threatened, software stocks may continue to underperform the broader market. The performance gap versus the S&P 500 could persist, and volatility may remain elevated as earnings season unfolds.
Investors who hold software names through sector funds or growth-oriented portfolios should be prepared for more swings. It’s also worth watching how other software companies report in the coming weeks—if more disappoint, the selloff could deepen; if some show AI-driven strength, it could help restore confidence.
For now, the market is sending a clear message: the old playbook may not be enough. AI is forcing investors to ask hard questions about which software businesses will thrive and which will be left behind. Until those answers become clearer, caution is likely to rule the day.
