US software stocks slump as AI disruption fears take over

By Shashwat Chauhan

Jan 29 (Reuters) - U.S. software stocks fell on Thursday after SAP's underwhelming cloud outlook and a post-earnings slide in ServiceNow deepened concerns that traditional providers are being outpaced by artificial-intelligence players.

Germany's SAP SAPG.DE plunged more than 16% as analysts flagged that its cloud backlog and 2026 revenue forecast fell short of projections. ServiceNow NOW.N dropped 11% despite forecasting annual subscription revenue above Wall Street estimates.

U.S. software stocks have posted double-digit declines in the past one year as investors feared that advances in AI capabilities, which include instant production of computer codes and apps at a cheaper rate, could challenge SaaS (software as a service) companies that sell subscription-based products to clients.

"The malaise in software sentiment persists, coupled with a seemingly paradoxical and vicious cycle of depressed valuations, with maintained, if not rising, investor expectations," J.P.Morgan analysts said in a note.

The double-whammy dragged Salesforce CRM.N shares down 7.1%. Photoshop maker Adobe ADBE.O lost 3.9% and cloud security firm Datadog DDOG.O fell 8.3%.

Investors also kept an eye on Microsoft MSFT.O, which said it had spent a record amount on AI in the last quarter and posted slower cloud-computing growth. Its shares slid 12.1%.

Enterprise software services firm Atlassian TEAM.O slid 12.6%, cloud security firm Zscaler ZS.O lost 6.3%, financial software company Intuit INTU.O shed 7.8% and marketing software firm HubSpot HUBS.N was down 11.5%.

"All these software names are performing terribly because the market's kind of in our view pricing a worst-case scenario that software is dead because AI is disrupting the space," said Adam Turnquist, chief technical strategist for LPL Financial.

Software stocks were among the biggest decliners on the Nasdaq .IXIC, while the S&P 500 Software and Services Index .SPLRCIS dropped 8.7% to hit a nine-month low.

These companies have also turned to M&As to bolster their AI capabilities. Last year, ServiceNow purchased cybersecurity startup Armis for $7.75 billion, while Salesforce bought data management platform Informatica for $8 billion.

While software companies have struggled, chip-making and memory storage firms have emerged among the big winners of the AI race.

The Philadelphia SE Semiconductor Index .SOX and memory firms such as SanDisk SNDK.O and Western Digital WDC.O have gained sharply in January, while the S&P 500 Software sector .SPLRCSOFW is down more than 13%.