US software stocks dropped sharply on Thursday as investors grew more worried that artificial intelligence is starting to threaten traditional SaaS companies. Weak updates from SAP and a steep post earnings fall in ServiceNow added to fears that older software providers could lose ground to AI driven competitors.
SAP and ServiceNow Trigger Fresh Selloff
Germany based SAP sank more than 16% after analysts said its cloud backlog and its 2026 revenue outlook came in below expectations. At the same time, ServiceNow slid 11%, even though it projected annual subscription revenue above Wall Street forecasts.
Together, these results pushed investors to reassess the future growth story for major software companies.
SaaS Names Drop as Investors Price in AI Threat
Software stocks have already been under pressure over the past year, with many names posting double digit declines. A key concern is that AI tools can now produce code and applications quickly and at lower cost, which may reduce demand for subscription based software products.
JPMorgan analysts said negative sentiment in the sector continues, creating a cycle where valuations fall but investor expectations remain high.
Major losers included:
- Salesforce down 7.1%
- Adobe down 3.9%
- Datadog down 8.3%
Microsoft Spending Raises More Questions
Investors also watched Microsoft closely after the company reported record AI spending in the latest quarter and slower cloud growth. Microsoft shares fell 12.1%, adding more pressure to the software sector overall.
Other big declines included:
- Atlassian down 12.6%
- Zscaler down 6.3%
- Intuit down 7.8%
- HubSpot down 11.5%
Analysts noted that the market is acting as if a worst case scenario is coming, where software companies lose their edge because AI changes the entire business model.
Software Firms Turn to M&A to Catch Up in AI
To strengthen their AI capabilities, many software companies are leaning more on mergers and acquisitions.
Examples include:
- ServiceNow buying Armis for $7.75 billion
- Salesforce buying Informatica for $8 billion
These deals show that major firms are trying to defend their market position as AI competition increases.
Chip and Memory Stocks Win the AI Race
While software companies have struggled, chipmakers and memory storage firms have been among the biggest winners from AI growth.
In January:
- The Philadelphia SE Semiconductor Index rose sharply
- Memory names like SanDisk and Western Digital gained strongly
Meanwhile, the S&P 500 Software sector is down more than 13%, highlighting how investor money is shifting away from software and toward hardware and AI infrastructure
