Key Takeaways
- Shares of Datadog and Figma plunged more than 15% following quarterly reports that raised margin concerns among investors
- Palantir skyrocketed 30% on robust revenue performance, with Cloudflare and JFrog also delivering positive results
- Figma highlighted how AI inference expenses are pressuring gross margin profitability
- The iShares Expanded Tech-Software Sector ETF has climbed 35% since April bottoms but remains negative 3% for the year
- Selecting successful AI software investments proves challenging as company performance shows significant divergence
Thursday proved volatile for software equities as quarterly reporting season highlighted the complexity of identifying AI software leaders. Both Datadog and Figma experienced declines exceeding 15% despite surpassing revenue and earnings projections.
Profitability metrics drove the selloff. Datadog’s adjusted gross margin registered at 80%, falling short of the 80.7% analyst consensus. Though modest, this shortfall rattled investors already anxious about artificial intelligence reshaping software economics.
Figma faced comparable headwinds. The design collaboration platform exceeded earnings expectations yet cautioned that escalating AI inference expenses are compressing margins. Currently, Figma absorbs the operational costs of processing AI model queries for beta features without passing charges to end users.
“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.
Sharp Divergence Across Software Sector
Several software companies bucked the downward trend. Palantir surged 30% Tuesday following impressive revenue expansion. The data analytics firm also challenged OpenAI and Anthropic directly during its results presentation, questioning their enterprise AI strategies.
Cloudflare and JFrog similarly reported encouraging outcomes and gained ground during the week. These companies characterized artificial intelligence as an accelerator for their operations instead of a competitive risk.
HubSpot and Salesforce numbered among those experiencing declines. The inconsistent performance across names demonstrates that software companies are navigating the AI transformation along vastly different trajectories.
What This Means for Software Sector Investors
The iShares Expanded Tech-Software Sector ETF dropped over 2% Thursday. While the fund has rebounded more than 35% from April lows, it continues trading 3% below year-to-date breakeven.
In contrast, the PHLX Semiconductor Index has declined 15% since early July. Software stocks have outpaced semiconductor equities during this compressed timeframe, though the year-long performance gap remains substantial.
The AI investment theme faced complications from forced liquidation at Situational Awareness, an AI-focused hedge fund. This selling pressure impacted infrastructure stocks during summer months and reinforced speculation that investment capital was rotating toward software companies.
However, current earnings results demonstrate this narrative lacks clear confirmation. Even Alphabet has reorganized its AI research division following a stretch of recognition as an exemplary developer.
Investors anticipating a broad-based software sector recovery are discovering execution timing remains elusive. The performance chasm separating gainers like Palantir from fallers like Datadog underscores that software stocks carry significant selectivity risk at present.
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