Key insights
- Software stocks are under pressure due to concerns about AI disruption, highlighted by slowing growth in IBM's Red Hat cloud unit and deal delays for ServiceNow. While both companies beat expectations, investors are questioning the ability of software companies to translate AI stories into tangible returns. Conversely, analog chipmakers like Texas Instruments are surging on strong forecasts, reflecting the diverging fortunes driven by the AI boom.
April 23 (Reuters) - U.S. software stocks fell in premarket trading on Thursday, following quarterly results from IBM and ServiceNow that reignited fears about AI-driven disruption across the sector.
International Business Machines said its revenue growth slowed in the first quarter, pressured by weakness in its software business, anchored by its Red Hat cloud unit. Growth in the segment slowed to 11.3%, sending the Big Blue's shares 7.4% lower.
ServiceNow also flagged a hit to its first-quarter subscription revenue service, citing delays in Middle East deals due to the ongoing Iran conflict.
Although both companies reported first-quarter revenue and profit above analysts' expectations, the results failed to allay investor fears about the sector.
"The challenge is shifting from simply having an AI story to proving that it can support products, workflows, and returns," said analysts at UBS Global Wealth Management.
"Widespread disruption in software is more likely a long-tail scenario than an immediate one, especially for enterprise-facing and mission-critical providers with sticky customer relationships."
Investor concerns around AI disruption have been building since Anthropic launched new tools in February that automated tasks across domains, including marketing and data analytics, raising questions about the pressure such products could put on traditional software businesses.
Microsoft lost 1.8% in premarket trading. Adobe fell 2%, CrowdStrike was off 2.2%, Intuit was down 3.2% and Datadog shed 2.4% before the bell.
Meanwhile, analog chipmaker Texas Instruments surged 11.7% after it forecast second-quarter revenue and profit above estimates.
Other analog chip suppliers, including ON Semiconductor, Microchip Technology, NXP Semiconductors and Analog Devices, also climbed, between 3.7% and 4.7%.
The AI boom has brought opposing fortunes for chip stocks and software, with the S&P 500 software and services index down over 13% so far this year, while the Philadelphia SE Semiconductor index has jumped almost 40%.
The benchmark S&P 500 has gained about 4% in the same period.
(Reporting by Purvi Agarwal and Shashwat Chauhan in Bengaluru; Editing by Shinjini Ganguli)