Key Takeaways
- Datadog and Figma experienced sharp declines exceeding 15% following quarterly reports that raised margin concerns among investors
- Palantir delivered impressive gains of 30% on robust revenue performance, with Cloudflare and JFrog joining the winner’s circle
- Figma highlighted increasing AI inference expenses as a factor pressuring gross margin performance
- The iShares Expanded Tech-Software Sector ETF has climbed 35% since April’s bottom but remains 3% lower year-to-date
- Identifying successful AI software companies proves challenging as quarterly results show dramatic divergence across the industry
Thursday proved turbulent for software equities as earnings reports highlighted the complexity of identifying AI software leaders. Both Datadog and Figma experienced declines exceeding 15% despite delivering results that surpassed analyst expectations for revenue and earnings.
The selloff centered on profitability metrics. Datadog’s adjusted gross margin registered 80%, falling short of the 80.7% analyst consensus. Though the shortfall was minimal, it triggered selling among investors already concerned about artificial intelligence disrupting traditional software economics.
Figma encountered comparable challenges. The design collaboration platform exceeded earnings forecasts but cautioned that escalating AI inference expenses are compressing margins. The company currently shoulders the computational costs of processing user AI prompts for beta features without passing charges to customers.
“We do not charge our customers for their usage of products that are currently in beta, and we bear the cost of inference without offsetting consumption revenue,” said Figma CFO Praveer Melwani on the company’s earnings call.
Sector Performance Shows Sharp Divergence
Several software companies bucked the negative trend. Palantir soared 30% Tuesday following a strong revenue report. During its earnings presentation, management directly challenged OpenAI and Anthropic’s enterprise AI strategies, expressing confidence in its competitive position.
Cloudflare and JFrog delivered positive reports and recorded weekly gains. Both organizations characterized artificial intelligence as an opportunity driving growth rather than a competitive risk.
HubSpot and Salesforce joined the declining stocks. The mixed outcomes demonstrate that software companies are navigating the AI transformation with vastly different results.
Market Implications for Software Investors
The iShares Expanded Tech-Software Sector ETF declined more than 2% Thursday. The fund has rebounded over 35% from April’s trough but continues trading 3% below its year-to-date starting point.
Meanwhile, the PHLX Semiconductor Index has dropped 15% since early July. Software stocks have outperformed semiconductor equities during this recent period, though significant performance gaps persist over longer timeframes.
Market dynamics were complicated by forced liquidations from AI-focused hedge fund Situational Awareness. These sales pressured infrastructure-related stocks during the summer months and contributed to narratives suggesting value migration toward software companies.
However, recent earnings results challenge this simple narrative. Even Alphabet has reorganized its AI research division following earlier acclaim for its development approach.
Investors anticipating a comprehensive software sector recovery face challenging timing decisions. The performance gap between success stories like Palantir and disappointments like Datadog demonstrates that the sector offers no guarantees in the current environment.
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