Software stocks took a hit on Thursday, with cybersecurity firm Fortinet plunging 25% and enterprise software provider ServiceNow dropping 18.1% in premarket trading. The sharp declines came even as both companies reported results that, on the surface, weren't all bad. The moves underscore a growing investor anxiety: artificial intelligence may be changing how software companies make money, and the market is still trying to figure out who wins and who loses.
What happened
Fortinet, which makes network security products, beat third-quarter expectations and raised its full-year earnings and revenue outlook. Yet analysts at several brokerages cut their price targets anyway. Their reasoning: the market needs clearer evidence that new growth areas can offset slower demand elsewhere. ServiceNow, which sells software that helps companies automate workflows, slipped after a third-quarter profit miss, even though it offered a better full-year outlook for subscription revenue and cash flow margins.
The pain wasn't contained to those two names. Drops spread to peers like Salesforce, Palo Alto Networks, CrowdStrike, and Zscaler, as traders treated the news as a wider read on software demand and competition in an AI-heavy world.
Why AI is the elephant in the room
At the heart of the selloff is a debate that has been simmering for months: will AI be a feature that helps software vendors charge more, or a substitute that weakens their pricing power? If AI models can do tasks that previously required expensive software licenses, customers may push back on price increases or even cancel subscriptions. On the other hand, if AI makes software more valuable, vendors could capture more revenue.
That uncertainty helps explain why the S&P 500 Software & Services Index is up only about 6% year to date, lagging the broader S&P 500. It also explains why even "good" quarters can get punished. Investors are not just scoring the latest three months; they are trying to estimate how AI will reshape the long-term economics of the software industry.
What it means for investors
For everyday investors, the most important takeaway is how quickly software valuations can reset. When a stock can fall 25% even after raising guidance, the market is signaling that it's rethinking the long-term math, not just this quarter's numbers.
Software companies are often valued on profits expected far in the future. AI-driven disruption widens the range of plausible future growth and profit margins, so investors demand a higher "equity risk premium" — a bigger cushion for uncertainty. When that required return goes up, the present value of future cash flows goes down, and valuation multiples can compress quickly.
Price-target cuts are the public version of that repricing. Analysts adjust their assumptions about long-run growth, margins, and the discount rate used to value future cash flows. And once those assumptions move for one or two bellwethers, it can trigger bigger-than-usual post-earnings swings and fast spillovers across the sector.
This dynamic is not unique to software. Similar concerns have weighed on China tech stocks and Asian markets as investors question whether AI spending will translate into profits. The pattern is global: any company that relies on selling software or services that AI could replicate is under scrutiny.
What to watch next
Investors will be watching how other software companies fare in the coming weeks. If more bellwethers report similar patterns — beating on the headline numbers but disappointing on forward-looking metrics — the sector could face further pressure. Conversely, if companies can show that AI is boosting demand rather than eroding it, the selloff could prove short-lived.
For now, the message from the market is clear: in an AI-driven world, software companies need to prove they can adapt. Those that can't may see their valuations reset, no matter how good the quarter looks on paper.
