Oct 29 (Reuters) – Shares of software companies tumbled on Thursday following disappointing results from Fortinet and ServiceNow, deepening worries about AI disruption that has plagued the sector.
Software companies have been under intense scrutiny this year as investors weigh the likelihood of newer AI models disrupting traditional business models.
The S&P 500 Software & Services Index rose only 5% this year, less than half the gains recorded by the S&P 500.
Fortinet tanked 26% to a five-month low after the company reported slower product revenue growth in the third quarter and lowered its service revenue forecast for the year. The stock was the top decliner on Wall Street’s benchmark index.
BofA Global Research downgraded the stock to “neutral” from “buy”, and at least 15 other brokerages cut their price targets on the stock.
“Our rating downgrade reflects less confidence in the timing of the next leg of earnings upside. Longer component lead times and the normalization of Fortinet’s inventory advantage are limiting its ability to meet demand,” BofA said.
ServiceNow slid 23% and was set for its biggest one-day drop on record as a third-quarter profit miss overshadowed a raise to its full-year subscription revenue and cash flow margin outlook.
At least 12 brokerages lowered price targets on the stock, with analysts at Raymond James pointing to lagging subscription revenue and backlog growth, while AI initiatives are yet to materialize.
The companies’ results weighed on other software stocks. Salesforce fell 4%, Palo Alto Networks slid 1.8%, Atlassian lost 6% and Zscaler shed 1.1%.
Alphabet’s Google on Wednesday unveiled Gemini 4 Carbon, its latest frontier AI model, stepping up competition with OpenAI and Anthropic as the race to build more capable coding and cybersecurity systems intensifies.
(Reporting by Johann M Cherian in Bengaluru; Editing by Shinjini Ganguli)
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