Software stocks swing wildly amid AI threat debate

Software stocks swing wildly week to week as Wall Street grapples with a fundamental question: will artificial intelligence destroy the software industry or simply reshape it? According to CNBC, investors are caught between two clashing narratives. On one side, companies like Atlassian and Twilio posted earnings strong enough to trigger rallies of over 20%. On the other, Airtable sold for less than $1.3 billion, down from a $12 billion peak just five years ago.

The market whiplash reflects genuine uncertainty about what happens when AI coding tools become mainstream. Some worry that businesses will build their own software using tools like Claude Code rather than pay for expensive off-the-shelf products. Others are now pushing back against that doom scenario.

Box CEO Aaron Levie captured the emerging nuance when he challenged what he called a “misplaced thesis” that AI agents would be catastrophic for all software categories. The reality, he suggested, is more granular: some software faces real risk, but many reports of the industry’s death have been exaggerated.

Why software stocks swing wildly right now

The volatility stems from conflicting evidence arriving almost simultaneously. HubSpot lost 19% in a single day after disappointing earnings. Datadog, a monitoring software company, plunged 19% in its worst drop since its 2019 IPO when it revealed that its largest customer (widely believed to be OpenAI) had cut usage. These drops reinforced fears that AI companies are building internal tools rather than licensing external software.

Yet the very next day brought countervailing signals. Atlassian reported its most profitable quarter since 2021. Twilio posted solid numbers. Cloudflare, which sells cybersecurity tools, gained 5.6%. Atlassian’s stock shot up 35%, its best day since going public in 2015.

According to Matt Hedberg, a software analyst at RBC Capital Markets, investor sentiment has swung to an extreme. In the first quarter of 2026, software was so out of favour that institutional clients literally wouldn’t meet with software executives. “People were pencils down in the space,” Hedberg said. “They just didn’t feel like it was worth their time.” That’s how badly the sector had fallen.

The iShares Expanded Tech-Software Sector ETF, which tracks the broader industry, crashed 24% in Q1 (its worst quarter since 2008) but has since recovered to just 3% down for the year. Compare that to the Nasdaq, which is up 15%. The sector is alive, but severely wounded.

What’s actually happening beneath the headlines

The real story is more complicated than either “AI will kill SaaS” or “SaaS is fine.” Different software categories face different threats. Coding agents genuinely do pose a danger to some products. Datadog’s disclosed customer cut is not a phantom worry. When OpenAI builds internal monitoring tools using Claude Code instead of licensing Datadog, that’s lost revenue.

But the market has overshot in assuming this pattern applies everywhere. Atlassian sells collaboration software used by thousands of teams to coordinate work, manage projects and track issues. An AI agent can write code faster, but it cannot replace a tool that your entire engineering team depends on for daily workflow. The economics are different.

Similarly, Salesforce CEO Marc Benioff has spent months defending his customer relationship management software against the argument that Claude can replace it. Salesforce has lost over 40% of its value since end of 2024 despite accelerating revenue growth and stable margins. The stock is priced as if the company is doomed, yet the financial results don’t reflect that doom.

One sign of misplaced pessimism: there have been almost no SaaS initial public offerings in 2026, and venture capital has fled to AI companies (86% of private deal value went to AI firms in the first half of 2026). Venture-backed software startups that raised money at eye-watering valuations in the pre-AI era now face a market that won’t fund them at any price. That’s a real problem for those companies, but it doesn’t mean existing, profitable software firms are worthless.

Why did some stocks jump 20% or more on a single earnings report?

Part of the move was genuine relief that these companies remain profitable and are investing in AI rather than being disrupted by it. Atlassian CEO Mike Cannon-Brookes had cut 10% of the workforce (1,600 people) five months earlier to fund AI investment and strengthen margins. The strong quarter showed that painful restructuring was working.

But analysts also flagged a technical factor: short covering. Many investors had bet against software stocks by borrowing shares and selling them (shorting). When Atlassian reported well and proved the doomsayers wrong, those short sellers scrambled to buy back shares to limit losses. That buying demand amplifies any upside move. Rishi Jaluria, another RBC analyst, noted that Atlassian’s 35% pop was likely “a short squeeze” as much as organic investor enthusiasm.

What this means for you

If you hold software stocks or software-heavy funds in your portfolio, the key takeaway is that this sector is being reassessed, not written off. The question is which software companies will thrive in an AI world and which will fade. That requires looking beyond the hype and at actual customer behaviour and earnings quality.

• Diversification matters. Software is now split into winners and losers. Holding a broad software ETF gives you exposure to both. If you own individual software stocks, you need conviction about which companies will adapt and which won’t, or you’ll experience swings like we’ve seen this week.
• Growth alone isn’t reassuring anymore. Salesforce has grown revenue and maintained margins, yet lost 40% of its value. The market is pricing in a earnings risk, not a growth risk. Look for companies that are actually profitable and reinvesting in AI rather than just talking about it.
• Earnings reports are now verdict days. When a software company reports, the market now expects evidence that it’s either immune to AI disruption or actively using AI to improve its offering. A miss on either count triggers severe punishment. A beat can spark a squeeze as short sellers cover. Be prepared for volatility around earnings.

For deeper analysis on how artificial intelligence is reshaping different sectors and how to position a portfolio during rapid technological change, explore Thewealthora’s guides on tech investing and earnings season strategy.

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Originally reported by CNBC. Facts verified; analysis and wording are Thewealthora’s own.

Arpit Soni

The Thewealthora desk covers markets, money and personal finance, with zero jargon and every claim sourced.