Bill McDermott, chairman and CEO of ServiceNow, speaks during an interview on the floor of the New York Stock Exchange on October 26, 2023.
Brendan Mcdermid | Reuters
Software stocks fell deeper into what has continued to be a sharp selloff this year on Thursday, as investors shied away from the sector amid growing fears that artificial intelligence could upend many companies’ business models.
The iShares Expanded Tech Software Sector ETF (IGV) fell 5.4%, marking its biggest daily decline since last April during the tariff-triggered downturn. The fund is now about 22% below its recent peak, pushing the software industry into bear market territory and underscoring how quickly sentiment has turned against one of Wall Street’s former favorite industries.
Month to date, IGV is down more than 13%, on par with its worst month since October 2008, when the fund fell 23%.
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The iShares Expanded Tech-Software Sector ETF over one year
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ServiceNow 5 days
“Good, but not good enough,” Morgan Stanley analysts said in a note on the ServiceNow report. “In an environment of heightened investor skepticism toward incumbent application providers, stable growth in line with expectations is unlikely to change the narrative.”
Pressure has intensified across the industry as investors question whether AI competitors and automation tools could erode demand for traditional software licenses and workflows. Valuations once justified by steady subscription growth are being readjusted as investors assess the possibility that AI could permanently dent long-term revenue potential.
Megacap Microsoft Pressure rose 10% after a slowdown in cloud growth was reported for the fiscal second quarter, putting the stock on track for its biggest daily decline since March 2020. The company also gave weaker-than-expected operating margin guidance for the fiscal third quarter.
Investors’ unease was compounded by the rapid pace of AI development itself. Anthropic released Claude Opus 4.5 late last year, its third major model launch in just two months. The company said the model excels at programming, operating computers and assisting with complex business tasks. Ideal users include professional software developers and knowledge workers such as financial analysts, consultants and accountants.
“It’s a little embarrassing that in 10 days Anthropic was able to invent it, collaborate on it, release it and everyone… could look at it and say, ‘Wow, why isn’t Microsoft doing this? Why don’t I know about this?'” And that’s a narrative they need to correct,” Ben Reitzes, head of technology research at Melius Research, said on CNBC’s “Squawk on the Street.” “I think patience will run out down the road.”
Also on Thursday, JUICE fell 15.2% after the German software giant reported weaker-than-expected growth in its cloud contract book in the fourth quarter. Current cloud orders rose 16% to 21.1 billion euros ($25.3 billion), falling short of expectations for growth of about 26%, which UBS analysts called a “disappointment.”
ServiceNow CEO Bill McDermott sought to allay investor fears during the company’s earnings call on Thursday, saying concerns that AI will displace software providers are misplaced.
“The real win comes when trillions of tokens move beyond the pilot phase and are embedded directly into the workflows where business decisions are made,” McDermott said. “ServiceNow is the gateway to this change and serves as the semantic layer that makes AI ubiquitous in the enterprise.”
He added that companies still need workflow software to ensure consistent business results because AI systems are probabilistic.
– With assistance from CNBC’s Samantha Subin.