Key Points
IBM didn't raise its full-year guidance.
ServiceNow increased its 2026 fiscal year guidance for subscription revenues, but it is facing headwinds in the Middle East.
In the current environment, embattled software stocks must clearly demonstrate to investors that their businesses can sustain strong growth and integrate artificial intelligence.
- 10 stocks we like better than ServiceNow ›
For decades, software stocks were considered the cream of the crop. But in today's landscape, posting solid earnings results is no longer enough to win over the market in what has become an embattled sector.
Shares of IBM (NYSE: IBM) and ServiceNow (NYSE: NOW) tanked today after both companies reported earnings last night. Shares of IBM had fallen nearly 9%, while ServiceNow's had crashed nearly 18%, as of 2:02 p.m. ET.
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While both companies reported earnings that came in ahead of Wall Street consensus estimates, investors found other issues, including guidance and factors largely outside the companies' control, such as the Iran war.
Image source: Getty Images.
IBM and ServiceNow's results also seemed to impact the broader sector, which had been on a recent win streak. Shares of the iShares Expanded Tech-Software Sector ETF had fallen by over 7%.
Here's what else investors need to know.
In this environment, investors want results
Investors have grown concerned that AI will make it much easier to build software services and solutions, so even the current companies dominating the software landscape could face eroded margins and a loss of pricing power, leading to lower multiples in a sector that has long carried strong growth valuations.
That said, nothing about IBM or ServiceNow's results indicated that AI has changed their core business proposition.
IBM beat Wall Street's adjusted earnings per share expectations by $0.10, while revenue also came in $300 million higher. However, management reiterated its 2026 guidance, which apparently didn't go over well with the market.
"That's what you get for asking to be a software stock – investors don't like in-line guides," Melius Research analyst Ben Reitzes said in a research note following the earnings report, according to Barrons.
CFO Jim Kavanaugh said on the company's conference call, "I don't think we've ever raised guidance in a first quarter." The company also said that the Iran war and other happenings in the Middle East did not impact the company in the first quarter.
ServiceNow's earnings and revenue came roughly in line with consensus estimates. Management also boosted its fiscal 2026 guidance for subscription revenues, with CFO Gina Mastantuono adding that she "took a little bit of incremental conservatism" with the guidance due to developments in the Middle East.
ServiceNow, a cloud provider of workflow automation services that can be implemented across an entire enterprise, said subscription revenue growth was hit by delays in deals in the Middle East. Still, Mastantuono said that ServiceNow's AI offerings are performing well and on pace to surpass the company's 2026 revenue target of $1 billion.
Following the report and sell-off, Barclays analyst Raimo Lenschow issued an overweight rating and a $132 price target, implying 57% upside from current levels. He said macro issues impacted the results but were not a "thesis changer."
Lenschow also said he views ServiceNow as one of the strongest positioned in the software space because its "deep integration into its customers' IT landscape will make it an integral part of the new AI world."
Ultimately, it's just a very difficult environment for the software sector, which is something investors likely aren't used to.
Stocks like IBM and ServiceNow certainly seem well-positioned to navigate this new AI world, but investors will likely be paddling upstream in the near term, and there is still a lot we don't know about how AI will impact the world moving forward.
Investors can begin building long-term positions in sold-off software stocks that can adapt and effectively implement AI into their businesses, but they should keep the above factors in mind. Conditions in the sector could still be extremely volatile in the near term.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines and ServiceNow. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
