There's growing confidence in the idea that traditional software companies will be able to withstand AI disruption
Shares of ServiceNow closed up 6.5% on Wednesday.
Investors found a slew of reasons to lean into the software trade on Wednesday, and ServiceNow's stock was out in front.
While artificial-intelligence disruption fears have dogged the sector this year, investors seem to be coming around to the view that some software-as-a-service companies will hold up better than others in the AI era.
And now, upbeat earnings results are energizing software investors. So are new signs suggesting that OpenAI is growing more slowly that expected, further easing the perceived threat that AI will upend the software sector.
Shares of ServiceNow (NOW) closed up 6.5% on Wednesday, and shares of Figma $(FIG)$, Workday (WDAY), and Adobe $(ADBE)$ closed up between 3% and 4%.
The iShares Expanded Tech-Software Sector ETF IGV, a proxy for software stocks, finished 1% higher.
Bank of America analyst Tal Liani raised his price target for a number of software companies on Wednesday, including ServiceNow, Figma, Workday, Adobe and Snowflake, saying that while he remains selective when it comes to his software picks, these companies are among those that have demonstrated strong potential to monetize AI.
He raised his price target for ServiceNow to $150 from $130 and reiterated his buy rating. The stock closed Wednesday at $127.20.
ServiceNow helps businesses manage their internal processes like onboarding and human resources. And Liani noted that the company owns historical data and context on how companies conduct their workflows, which he thinks positions it well to implement agentic-AI solutions. ServiceNow's in-depth knowledge of how its customers operate will translate to sustained revenue growth and free-cash-flow expansion, he believes.
He also said the company beat Wall Street's expectations for growth of current remaining performance obligations and subscription revenue during the second quarter.
Raymond James analyst Adam Tindle told MarketWatch that data points from AI companies like OpenAI have been "mixed" recently, which could also be good for software stocks.
He said that the potential of slowing momentum for AI companies reduces the "existential perceived threat" that AI could kill software-as-a-service businesses like ServiceNow.
On Tuesday, the Wall Street Journal reported that OpenAI told investors that its revenue grew to $6.7 billion in the three months ended in June, up 18% from the first quarter, while its operating loss widened to $12.3 billion, from $9.3 billion in the first quarter, figures which the report said came as disappointing to investors.
OpenAI did not immediately respond to a request for comment.
Yet beyond ServiceNow, a broader shift in investor sentiment toward the software sector is at play, Benchmark analyst Yi Fu Lee told MarketWatch.
"What is changing now is that the market is beginning to see improving conviction in the underlying fundamentals and the growing realization that software is becoming a beneficiary of enterprise-AI deployment rather than a victim of AI disruption," he said.
ServiceNow is his top large-cap software pick, he said.
"What feels different today is that investors are rewarding companies that are showing tangible evidence of AI adoption, customer spending and monetization."
Lee noted that cybersecurity is emerging as a bigger part of the story for the company, and he has been impressed with the work and vision of Yevgeny Dibrov, who now leads ServiceNow's cybersecurity efforts.
ServiceNow's security and risk business crossed $1 billion in annual contract value last year.
See also: Why every tech giant wants to look like a cybersecurity company in the AI era
-Hannah Pedone
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