Salesforce led the plunge, with US software stocks across the board collapsing. Is it a matter of transformation or death in the AI era?

In the past, strong performance growth was the main driving force behind the soaring stock prices of software companies. However, the latest quarterly financial reports show that former tech industry stars like Salesforce are facing severe challenges of growth slowdown. AI investments have diverted corporate spending, hindering them from maintaining their previous high growth pace.

Salesforce Suffers Worst Overnight Drop in 20 Years

Salesforce's stock price plummeted by about 20% on Thursday, marking the most brutal single-day drop in nearly 20 years and dragging down the entire US software sector by 5%, the largest single-day drop in two years. The company slightly lowered its full-year performance guidance, and the fourth-quarter financial report it released fell short of Wall Street expectations in terms of revenue, profit margin, and profitability.

The financial report shows that Salesforce's revenue in the last quarter only grew by 10.7%, hitting a record low. Even worse, its order growth rate year-on-year was only 3%, also hitting a historical low. Salesforce executives admitted that major deals are becoming increasingly difficult to close, with transaction sizes generally shrinking, and the total contract value indicator is also rarely increasing by double digits.

Salesforce's plight reflects the common challenges facing the entire software industry. Among the top ten largest software companies, eight companies saw their stock prices drop after releasing their latest performance results, with an average decline of 9%. The overnight iShares Software ETF (IGV) plunged by nearly 6%.

Taking Workday as an example, its last quarter's order data was disappointing, and the full-year subscription revenue expectations were also revised downward, leading to the heaviest stock price plunge in eight years. The CEO admitted that customers are reducing the number of employee usage authorizations when renewing contracts, cutting back on procurement scale. Meanwhile, Snowflake saw a significant downward revision in profit margin expectations due to heavy investments in AI, leading to investor sell-offs.

AI Investment Diverts Capital Expenditure, Putting Software Companies in a Dilemma

Analysts point out that the AI boom has two impacts on software companies. On the one hand, as AI is seen as the ultimate force in future technological development, software companies have to exert full force on the transformation path to avoid falling behind, which undoubtedly affects capital expenditures in other areas such as marketing; on the other hand, the customers of software companies are also heavily investing in AI, squeezing the investment in traditional software.

However, tech giants that have successfully transformed early have already tasted the benefits. Taking Microsoft as an example, relying on its ChatGPT and other generative AI services, the company's current revenue growth rate has surpassed that of old competitors like SalesforceInvestment bank analyst Brian Schwartz from Oppenheimer believes that software companies like Salesforce delivered "disappointing" results this quarter, with weak performance possibly indicating that AI spending is "stealing" investments from other areas and dragging down these companies' recruitment efforts.

Deutsche Bank analyst Brad Zelnick pointed out on Thursday that while bulls may see this as just a one-quarter performance, the bank believes that poor financial reports have cast serious doubts on the path to AI applications and their monetization prospects for software companies.

Software companies, including Salesforce, are not sitting idly by, but are increasing their investments in AI, seeking breakthroughs in this wave of upgrades to provide customers with more intelligent and efficient software products. However, proving that artificial intelligence can bring them substantial returns to offset the current sluggish growth will still require a lengthy process