Bill McDermott, chairman and CEO of ServiceNow, was interviewed on the floor of the New York Stock Exchange on October 26, 2023.
The iShares Expanded Tech-Software Sector ETF (IGV), a prominent tech fund, has dropped over 13% month-to-date, potentially marking its worst monthly performance since October 2008, when it plummeted 23%. On a single day, the fund experienced a 5.4% decline, reminiscent of the tariff-triggered downturn in April. Currently, IGV is down about 22% from its recent peak, leading the software industry into bear-market territory and illustrating how swiftly investor sentiment has shifted against this once-favorite industry on Wall Street.
Software stocks faced another sharp decline on Thursday amidst ongoing intense sell-offs this year. Investors are increasingly apprehensive about artificial intelligence revolutionizing business models for numerous firms. Despite ServiceNow surpassing fourth-quarter earnings expectations and providing favorable guidance, its shares fell by 10% on Thursday. Concerns over AI overshadowed these strong earnings.
The broader sector is under pressure as investors worry that AI competitors and automation could reduce the demand for traditional software products. Valuations supported by consistent subscription growth are being reconsidered as the possibility emerges that AI might permanently reduce long-term revenue potential.
"Good, but not good enough," remarked Morgan Stanley analysts, referring to ServiceNow's report. "Amid heightened investor skepticism surrounding incumbent application vendors, steady growth that aligns with expectations is likely insufficient to change the prevailing narrative."
Microsoft, one of the industry's major players, exacerbated the pressure by dropping 10% following a report of a slowdown in cloud growth for the fiscal second quarter. This decline puts its stock on track for its largest single-day drop since March 2020, compounded by lower-than-expected guidance on operating margin for the fiscal third quarter.
The rapid pace of AI development itself has heightened investor anxiety. Anthropic unveiled Claude Opus 4.5 late last year, its third major model released in just two months. This model excels in coding, operating computers, and assisting with complex enterprise tasks, targeting users such as professional software developers, financial analysts, consultants, and accountants.
"It is a little embarrassing that in 10 days, Anthropic was able to invent, co-work, put it out and everybody ... could look at it and go, 'Wow, why isn't Microsoft doing that? Why don't I know about that?' And that is a narrative they need to fix," said Ben Reitzes, head of technology research at Melius Research, on CNBC's "Squawk on the Street." "I think patience is going to run thin on the Street."
On the same day, SAP fell 15.2% after reporting weaker-than-expected growth in its cloud contract backlog for the fourth quarter. Its current cloud backlog increased 16% to 21.1 billion euros (approximately US$25.3 billion), which did not meet expectations for about 26% growth, prompting UBS analysts to express "disappointment."
During ServiceNow's earnings call on Thursday, CEO Bill McDermott attempted to alleviate investor concerns, arguing that worries about AI displacing software vendors are unfounded.
"The real payoff comes when trillions of tokens move beyond pilots to be embedded directly into the workflows where business decisions are made," McDermott stated. "ServiceNow is the gateway to this shift, serving as the semantic layer that makes AI ubiquitous in the enterprise." He added that, due to AI systems’ probabilistic nature, companies still need workflow software to ensure steadfast business outcomes.
— With assistance from CNBC's Samantha Subin.