For many years, software stocks were regarded as the elite choice for investors. However, in the current market environment, merely posting strong earnings results is insufficient for gaining investor confidence in what has transitioned into a highly competitive sector.
Today, shares of IBM (IBM 8.35%) and ServiceNow (NOW 17.77%) experienced significant declines after both companies released their earnings reports last night. As of 2:02 p.m. ET, shares of IBM plummeted nearly 9%, while ServiceNow’s shares fell almost 18%.
Despite both companies surpassing Wall Street’s consensus estimates for earnings, investors were troubled by other issues, including future guidance and external factors beyond the companies’ influence, such as the ongoing conflict in Iran.
Image source: Getty Images.
The disappointing earnings from IBM and ServiceNow also negatively affected the broader software sector, which had been enjoying a period of growth. The iShares Expanded Tech-Software Sector ETF saw a downturn of over 7%.
Investors should be aware of the following key insights.
Investors Demand Strong Performance in a Competitive Market
Investors are increasingly apprehensive that advancements in AI technology will make it simpler to develop software services and solutions. Consequently, even established companies currently dominating the software landscape may experience squeezed profit margins and diminished pricing power, which could result in lower valuations for a sector previously characterized by robust growth metrics.
However, the earnings results from IBM and ServiceNow did not suggest any fundamental shift in their core business models due to AI.
IBM exceeded Wall Street’s adjusted earnings per share expectations by $0.10, with revenue surpassing estimates by $300 million. Nevertheless, the management reiterated its guidance for 2026, which seemed to disappoint investors.
International Business Machines
Today’s Change
(-8.35%) $-21.04
Current Price
$230.82
Key Data Points
Market Cap
$236B
Day’s Range
$221.75 – $232.94
52wk Range
$220.72 – $324.90
Volume
1.1M
Avg Vol
6M
Gross Margin
57.59%
Dividend Yield
2.67%
“That’s what you get for asking to be a software stock – investors don’t like in-line guides,” commented Melius Research analyst Ben Reitzes in a research note after the earnings report, as reported by Barrons.
CFO Jim Kavanaugh mentioned during the company’s conference call, “I don’t think we’ve ever raised guidance in a first quarter.” He also noted that the Iran war and other events in the Middle East had no impact on the company’s performance in the first quarter.
ServiceNow’s earnings and revenue closely aligned with consensus estimates. Management raised their fiscal 2026 guidance for subscription revenues, with CFO Gina Mastantuono indicating that she “took a little bit of incremental conservatism” in her guidance due to ongoing developments in the Middle East.
ServiceNow, a leading cloud provider specializing in workflow automation services across entire enterprises, indicated that subscription revenue growth faced challenges due to delays in deal closures in the Middle East. Nonetheless, Mastantuono expressed that ServiceNow’s AI solutions are thriving and are on track to exceed the company’s 2026 revenue target of $1 billion.
In the aftermath of the report and subsequent sell-off, Barclays analyst Raimo Lenschow assigned an overweight rating and a $132 price target, suggesting a potential 57% upside from current levels. He acknowledged that macroeconomic issues affected the results but asserted they were not a “thesis changer.”
Lenschow also emphasized that he regards ServiceNow as one of the most well-positioned companies in the software sector due to its “deep integration into its customers’ IT landscape, making it an essential component of the evolving AI landscape.”
Today’s Change
(-17.77%) $-18.31
Current Price
$84.76
Key Data Points
Market Cap
$108B
Day’s Range
$83.59 – $90.03
52wk Range
$81.24 – $211.48
Volume
3.5M
Avg Vol
22M
Gross Margin
77.53%
Ultimately, the software sector is navigating a challenging environment, which is something that many investors may not be accustomed to.
While companies like IBM and ServiceNow appear to be strategically positioned to adjust to this new AI-driven landscape, investors should be prepared for potential challenges ahead, especially since there remains much uncertainty regarding how AI will shape the future.
Investors might consider gradually establishing long-term positions in solid software companies capable of adapting and effectively integrating AI into their business models. Nevertheless, it is crucial to remain aware of the factors mentioned above, as conditions in this sector could remain highly volatile for the foreseeable future.
