AI is splitting the software market

This quarter was always going to be a pivotal one for stocks, amid geopolitical upheaval—and so far, it’s delivering: Roughly 85% of S&P 500 companies have beaten expectations thus far.

But beneath that headline strength, investors are zeroing in on the parts of the market where the real tension is playing out. Yesterday, we looked at how the Iran conflict and rising oil prices are weighing on consumer companies. Today, the market’s attention shifted to another pressure point: software companies.

Software goes hard

Since the beginning of the year, the industry has been haunted by “SaaSpocalypse” fears—the idea that advanced AI agents could replace tasks traditionally done by enterprise software companies. But this week’s earnings suggest something more nuanced.

Take Datadog: The cloud security platform just delivered blowout results, with revenue topping $1 billion for the first time, and signed two major hyperscaler customers tied to training next-generation AI systems. Shares surged 30% yesterday, marking their biggest one-day gain since going public, and rose another 6.12% today.

Cybersecurity firm Fortinet told a similar story, posting a revenue beat driven by a 41% sales surge in its product segment. Notably, it saw a 31% jump in billings, its strongest growth in over three years. Looking ahead, management bumped up full-year guidance on rising cybersecurity threats, sending shares up 24% yesterday, and another 5.65% today.

But they can’t all be winners. Customer relationship management (CRM) platform HubSpot reported mixed results after the bell yesterday: While it beat on both revenue and earnings, second-quarter revenue guidance came in below expectations. Shares tumbled 19.05% this afternoon.

Adapt or die

The divergence across software names is telling, and it comes down to how each company is navigating the AI shift.

For Datadog, those hyperscaler deals are an early sign that AI may be additive, not disruptive. TD Securities analyst Andrew Sherman even called it a “must-own stock.” Meanwhile, Fortinet is riding a different side of the same wave: As AI systems scale, so do security risks, driving more demand for cybersecurity tools.

HubSpot, on the other hand, picked up multiple downgrades from William Blair, Cantor Fitzgerald, and Bank of America, as concerns mount around its AI transition. The company is shifting from selling traditional CRM tools to pushing AI agents that can run marketing and sales tasks—but while the move makes sense in the long run, BofA analysts say it introduces execution risks in the near term, which could weigh on sentiment until the model proves itself over the next few quarters.

Although HubSpot sold off today, it doesn't necessarily signal a return of the broader AI disruption fears. The entire software industry is slowly adapting to the AI shift—what investors need to pay attention to is where each company is in that transition, and how well they execute.—SY