TradingKey - On October 29, U.S. cloud computing service provider stocks generally weakened in pre-market trading, with ServiceNow (NOW) falling nearly 19%, Alphabet (GOOGL) dropping over 10%, NEBIUS (NBIS) and CoreWeave (CRWV) both falling over 6% at one point, IREN (IREN) and Salesforce (CRM) dropping over 5%, and Oracle (ORCL) falling over 2% at one point. The sell-off was mainly triggered by the earnings reports of ServiceNow and Alphabet, as market concerns over the quality of cloud computing growth, AI capital expenditure returns, and corporate valuations rapidly spread across the entire sector.
Source: TradingView
ServiceNow's third-quarter revenue stood at $4.106 billion, up 20.5% year-over-year and slightly above market expectations, but adjusted earnings per share came in at just $1.00, missing analyst estimates of $1.02. What concerned investors even more was that the company expects fourth-quarter current remaining performance obligations (cRPO) to grow 18.5% year-over-year, down from 20.5% in the third quarter, signaling a potential slowdown in revenue recognition growth over the coming year. Although the company raised its full-year guidance for subscription revenue and free cash flow margin, and increased its 2026 AI Annual Contract Value target to $1.7 billion, these positives were insufficient to offset the pressure from missed earnings and cooling order growth.
Alphabet's earnings report further amplified market caution. The company's third-quarter revenue was $127.58 billion, missing market expectations, while advertising revenue also fell short of Wall Street forecasts. Earnings per share came in at $2.12, weighed down by an unrealized loss of approximately $8.2 billion from its stake in SpaceX.
Meanwhile, Alphabet's capital expenditures for the quarter rose to $51.36 billion, with free cash flow turning to negative $9.1 billion, and management expects capital expenditures to increase significantly further in 2027. Although Google Cloud revenue jumped 103% year-over-year to $30.71 billion, investors remained more focused on the slowdown in search advertising growth and when the massive AI investments will translate into stable cash returns.
Broadly speaking, the market is re-evaluating the growth prospects and valuations of software companies amidst the AI boom. As investments in AI infrastructure continue to escalate, investors are not only looking at the demand for cloud services and AI products, but are also paying greater attention to whether companies can convert technology investments into sustainable revenue, profits, and cash flow.
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