Software stocks surge 19% as AI earnings ease SaaSocalypse fears

Software stocks posted their biggest two-week gain since April 2020, climbing 19 percent, as blowout earnings from Atlassian, ServiceNow and Cloudflare showed AI is expanding demand for enterprise platforms rather than replacing them.

"This would be my game changer stock of the day and key name to watch," Jordan Klein, managing director at Mizuho Securities, said of Atlassian, adding that the 30 percent-plus rally "gets chased."

Atlassian shares jumped 34 percent to $148.09 after the company reported fiscal fourth-quarter revenue of $1.77 billion, up 28 percent from a year earlier and ahead of the $1.66 billion consensus, with adjusted earnings of $1.87 per share versus $1.50 expected. Cloud revenue climbed 31 percent to $1.21 billion, and remaining performance obligations rose 44 percent to $4.8 billion. Twilio gained 27 percent and Cloudflare advanced 9 percent after their own beats.

The software rebound carries broad implications for the AI trade. With 85.1 percent of the 436 S&P 500 companies that have reported beating estimates, and the sector's two-week gain of 19 percent marking its best stretch since April 2020, investors are rotating back into revenue-growth names that had been sold off on AI-disruption fears.

Atlassian's Rovo AI Adoption Signals a Growth Driver, Not a Threat

Atlassian's quarter offered the clearest evidence yet that AI can lift, rather than erode, SaaS economics. The company returned to GAAP operating profitability for the first time in more than two years, delivering a 12 percent operating margin, while its Rovo AI platform is now used by more than 80 percent of Fortune 500 companies. Management said Rovo-assisted actions rose 50 percent quarter over quarter, and users of the AI tools completed 20 percent more Jira tasks and created 25 percent more Confluence pages than non-users.

"In the AI era, context is the edge," Chief Executive Officer Mike Cannon-Brookes said, announcing plans to buy back up to $250 million of the company's shares.

The results prompted a wave of upgrades. Bank of America lifted Atlassian to Buy from Neutral with a price target of $175, up from $105, calling the company "an AI beneficiary rather than AI victim." Jefferies raised its target to $200 from $150, and Wells Fargo to $180 from $140, citing 31 percent cloud growth and a fiscal 2027 outlook for 25.5 percent cloud expansion.

ServiceNow reinforced the theme, raising its fiscal 2026 subscription revenue forecast for the second time this year to between $15.760 billion and $15.780 billion after second-quarter subscription revenue of $3.88 billion beat the $3.82 billion consensus. Adjusted earnings of $0.90 per share topped estimates of $0.85. Cloudflare raised its full-year revenue guidance to $2.86 billion to $2.87 billion, from $2.805 billion to $2.813 billion, supported by 36 percent year-over-year growth and record net additions across large customer tiers.

Guidance and Valuations Face a Fresh Test

The rally has reset expectations quickly, and the next test is whether the companies can sustain the momentum. Atlassian guided to 13 percent annual revenue growth for fiscal 2027, well below the 28 percent reported for the latest quarter, as its Data Center business is expected to decline 17 percent while customers migrate to the cloud. The stock, down about 32 percent for the year before Friday, now trades at roughly five times forward sales even after the surge, according to Klein.

The broader backdrop is supportive. A July jobs report showing nonfarm payrolls fell by 23,000, against expectations for an 80,000 increase, cut the probability of a September rate hike to about 44 percent from 55 percent, easing pressure on high-multiple growth stocks. The Nasdaq Composite rose 1.28 percent Friday to 26,686.48, while the S&P 500 added 0.59 percent to 7,755.61.

For investors, the question is whether the software re-rating has further to run. Klein argued the sector is seeing "clear AI winners in software where revenue growth is accelerating," and that the market needs "more breadth than just a few infrastructure software names and security stocks." With software stocks up 19 percent in two weeks and Atlassian, Twilio and Cloudflare each drawing multiple price-target hikes, the sector's AI narrative has shifted from disruption to adoption — but the elevated valuations now hinge on continued execution through the next earnings cycle.

This article is for informational purposes only and does not constitute investment advice.