What Happened?

A number of stocks fell in the afternoon session after IBM issued a second-quarter earnings warning, suggesting that enterprise customers may be slashing software budgets to fund hardware purchases. 

Legacy workflow and application incumbents like ServiceNow (NYSE: NOW), Workday (NASDAQ: WDAY), and Salesforce (NYSE: CRM) fell alongside IBM. Conversely, cybersecurity platforms including CrowdStrike (NASDAQ: CRWD), Okta (NASDAQ: OKTA), and Zscaler (NASDAQ: ZS) rallied. 

This price action highlights a sharp divergence in how the market treats different software categories under macroeconomic pressure. IBM pre-announced adjusted earnings of $2.93 per share on $17.2 billion in revenue, missing Wall Street estimates of $3.01 and $17.86 billion, respectively. In a letter to investors, CEO Arvind Krishna revealed that the shortfall was driven by a sudden reprioritization of enterprise budgets in late June. Clients shifted their capital expenditure toward servers, storage, and memory chips to secure supply-constrained hardware ahead of expected price increases, causing "numerous large deals" to stall. 

The IBM pre-announcement provides evidence for a fear that pressured software multiples all year: the massive capital required to build out artificial intelligence hardware appears to be cannibalizing traditional IT budgets. When chief information officers are forced to choose between securing scarce memory chips or signing new enterprise workflow contracts, the update suggests hardware might be winning. Because IBM's broad exposure gives it a comprehensive view of enterprise wallets, its warning suggests a headwind for the broader software-as-a-service sector.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks.

Among others, the following stocks were impacted:

• Design Software company Adobe (NASDAQ: ADBE) fell 4.2%. Is now the time to buy Adobe? Access our full analysis report here, it’s free.
• Automation Software company ServiceNow (NYSE: NOW) fell 5.5%. Is now the time to buy ServiceNow? Access our full analysis report here, it’s free.
• Automation Software company Appian (NASDAQ: APPN) fell 2.9%. Is now the time to buy Appian? Access our full analysis report here, it’s free.

Zooming In On ServiceNow (NOW)

ServiceNow’s shares are very volatile and have had 25 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.

The previous big move we wrote about was 7 days ago when the stock gained 3.4% on the news that investors continued to rotate out of high-flying semiconductors into beaten-down software stocks. 

DigitalOcean's blowout preliminary results also supported the improved appetite as it showed proof that AI demand is converting into real, contracted revenue. The clearest signal is at the index level: the iShares software ETF (IGV) climbed roughly 7% over eight sessions even as the semiconductor SOXX fell ~8.5%. Microsoft rose ~3% on the week (after launching its $2.5B "Frontier" AI-services unit). 

ServiceNow and Salesforce each gained around +4%. DigitalOcean pre-announced that remaining performance obligations (RPO) would exceed $800M, more than 10x year-over-year and up over $550M in the quarter, driven by multiple new nine-figure AI inference contracts, with average contract life stretching from 1.6 to over three years. Revenue growth was guided to accelerate to ~29% (from a prior 24–25% guide), and margins to the high end. Coming after Q1's 221% jump in AI-customer ARR, it's hard evidence that AI spend is landing as durable, contracted backlog, not just usage that can evaporate.

ServiceNow is down 28.8% since the beginning of the year, and at $104.96 per share, it is trading 47.3% below its 52-week high of $199.24 from July 2025. Investors who bought $1,000 worth of ServiceNow’s shares 5 years ago would now be looking at only $932.22.

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