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Software stocks got pummeled this week after a cluster of troubling earnings reports – CNBC

Shares of cloud software vendor Salesforce plunged about 20% on Thursday, its biggest drop since 2004, after the company reported weaker-than-expected revenue and a disappointing earnings outlook. Chief Executive Marc Benioff said Salesforce grew rapidly during the pandemic as companies rushed to buy products for remote work, after which customers had to integrate and ultimately streamline all the new technology.

“Every enterprise software company has adapted in some way since the pandemic,” Benioff said on the company’s earnings call, noting that companies that have recently reported earnings “are all essentially saying the same thing in different ways.”

Software makers MongoDB, SentinelOne, UiPath and Veeva all lowered their full-year revenue outlooks this week.

The WisdomTree Cloud Computing Fund, an exchange-traded fund that tracks cloud stocks, fell 5% this week, its biggest drop since January. Paycom, GitLab, Confluent, Snowflake and ServiceNow all lost at least 10% of their value during the selloff.

Dell, which sells PCs and data center hardware to businesses, raised its full-year outlook on Thursday and said its AI server backlog had risen to $3.8 billion from $2.9 billion three months ago. But a growing share of these servers in its product mix and higher input costs will reduce the company’s full-year gross margin by 150 basis points.

Dell shares fell 13% this week after hitting new highs. The company is seen as a beneficiary of the generative AI wave as businesses ramp up hardware purchases. Expectations are “elevated,” Barclays analysts wrote in an earnings note.

Okta shares fell about 9% this week after analysts pointed to a smaller-than-expected subscription backlog, and the company said economic conditions were hurting the identity software maker’s ability to attract new customers and expand purchases among existing ones.

“Macroeconomic headwinds remain,” Okta Chief Financial Officer Brett Tai said in the company’s earnings call.

Inflation readings released this week came in slightly stronger than expected, and the U.S. central bank is keeping interest rates steady at their highest in 23 years.

Automation software developer UIPath Inc. saw its business slow in late March and April, in part due to the economy, co-founder Daniel Dines told analysts on Wednesday. Customers are also becoming more hesitant to enter into multiyear contracts, said Dines, who will take over as CEO on June 1, just months after stepping down as co-CEO, to replace former Google executive Rob Ensslin.

Cybersecurity software vendor SentinelOne is seeing a similar trend.

“There’s no question that buying habits are changing,” SentinelOne CEO Tomer Weingarten told CNBC on Friday, adding that “how customers evaluate software” is also changing. The company’s shares plummeted 22% in a week after the company’s guidance fell short of expectations.

Moreover, the impact of AI is forcing companies to shift their priorities.

Veeva CEO Peter Gassner cited “disruption at large companies advancing their AI plans.” Veeva, which sells life sciences software, saw its shares fall nearly 15% this week on concerns about spending later this year.

Gassner said on the earnings call that generative AI is a “competing priority” for Veeva’s customers.

The news wasn’t all bad: Shares of security software provider Zscaler rose 8.5% on Friday after the company reported better-than-expected quarterly results and raised its full-year guidance.

“We expect demand to remain strong as more enterprises plan to adopt our platform to strengthen their cyber and data protection,” CEO Jay Chaudhary said in the company’s earnings call.

—CNBC’s Ari Levy contributed to this report.

clock: Mike Bailey of FBB Capital says revenue is good but the company needs to improve its software execution.