TLDR
- Datadog and Figma shares fell over 15% after quarterly earnings disappointed investors on margins
- Palantir surged 30% after strong revenue growth, while Cloudflare and JFrog also posted gains
- Figma flagged rising AI inference costs eating into gross margins
- The iShares Expanded Tech-Software Sector ETF is up 35% from April lows but still down 3% year to date
- Investors are struggling to pick AI software winners as results vary widely across the sector
Software stocks had a rough session Thursday as earnings season exposed just how hard it is to pick winners in the AI software space. Datadog and Figma both fell more than 15% despite beating top and bottom line estimates.
The drops came down to margin concerns. Datadog’s adjusted gross margin came in at 80%, slightly below the analyst estimate of 80.7%. A small miss, but enough to spook investors who are already nervous about AI disrupting software business models.
Figma had a similar story. The design and collaboration platform beat on earnings but warned that rising AI inference costs are weighing on margins. Figma is currently absorbing the cost of running user prompts through AI models for beta products without charging customers for that usage.
“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.
Winners and Losers Split the Sector
Not every software company had a bad week. Palantir jumped 30% on Tuesday after reporting strong revenue growth. The company also took direct aim at OpenAI and Anthropic during its earnings call, dismissing their ambitions in enterprise AI.
Cloudflare and JFrog also posted strong results and rose on the week. Both companies pointed to AI as a tailwind for their businesses rather than a threat.
HubSpot and Salesforce were among the other names that fell. The uneven results make it clear that the software sector is not moving as one unit through this AI transition.
The Bigger Picture for Software Investors
The iShares Expanded Tech-Software Sector ETF fell more than 2% on Thursday. It has recovered over 35% from its April lows, but remains down 3% on the year.
By comparison, the PHLX Semiconductor Index is down 15% since the start of July. Software has outperformed chips over that short window, but the longer-term gap remains wide.
The AI trade has been complicated by a forced sell-off of stocks held by AI-focused hedge fund Situational Awareness. That added pressure to infrastructure names earlier this summer and fed the narrative that value was shifting toward software.
But this earnings season has shown that story is not playing out cleanly. Even Alphabet has reshuffled its AI research team after a period of being praised as a model developer.
Investors betting on a broad software comeback are finding the timing difficult. The gap between winners like Palantir and losers like Datadog shows the sector is far from a sure thing right now.
Stop guessing and start investing with confidence. KnockoutStocks gives you the AI insights, market intelligence, and stock research you need to spot opportunities, cut through the noise, and make smarter investment decisions — all in one powerful platform.
Sign up today and get 50% OFF full access to our premium stock picks.
Simply use coupon code SPECIAL50 at checkout to claim your exclusive discount.
Get 3 Free Stock Ebooks
Discover top-performing stocks in AI, Crypto, and Technology with expert analysis.
- Top 10 AI Stocks - Leading AI companies
- Top 10 Crypto Stocks - Blockchain leaders
- Top 10 Tech Stocks - Tech giants
