AI Earnings Season Divides Software Stocks: Palantir (PLTR) Soars as Datadog (DDOG) and Figma Tumble

Key Takeaways

Table of Contents

Datadog and Figma experienced double-digit declines exceeding 15% following quarterly reports that concerned investors about profit margins
Palantir rocketed 30% higher on robust revenue performance, with Cloudflare and JFrog similarly delivering positive results
Figma highlighted AI inference expenses as a factor pressuring gross profit margins
The iShares Expanded Tech-Software Sector ETF has climbed 35% since April’s bottom but remains in negative territory for the year at -3%
The disparity in quarterly results underscores the difficulty investors face selecting profitable AI software investments

Thursday delivered a turbulent trading session for software equities as quarterly earnings reports highlighted the complexity of identifying successful AI-powered companies. Despite exceeding revenue and profit projections, both Datadog and Figma witnessed share price declines surpassing 15%.

Datadog, Inc., DDOG

Profitability metrics drove the sell-offs. Datadog’s adjusted gross profit margin registered 80%, falling short of Wall Street’s 80.7% forecast. While the variance appears minimal, it triggered investor anxiety over AI’s potential to disrupt established software profit structures.

Figma encountered a parallel situation. Despite surpassing earnings expectations, the design collaboration platform cautioned that escalating AI inference expenses are compressing margins. Currently, Figma shoulders the computational costs of processing customer AI prompts for beta features without implementing usage fees.

“We do not charge our customers for their usage of products that are currently in beta, and we bear the cost of inference without offsetting consumption revenue,” said Figma CFO Praveer Melwani on the company’s earnings call.

Divergent Performance Across Software Companies

The earnings period produced mixed outcomes across the software landscape. Palantir experienced a remarkable 30% Tuesday rally following its disclosure of impressive revenue expansion. During its analyst call, the company directly challenged OpenAI and Anthropic, questioning their enterprise AI capabilities.

Cloudflare and JFrog delivered encouraging quarterly figures and achieved weekly gains. These organizations characterized artificial intelligence as a growth catalyst rather than a competitive threat to their operations.

HubSpot and Salesforce ranked among other prominent decliners. The inconsistent outcomes demonstrate that software companies aren’t navigating the AI transformation uniformly.

What This Means for Software Sector Investors

Thursday saw the iShares Expanded Tech-Software Sector ETF retreat more than 2%. While the fund has rebounded over 35% from April’s trough, it continues trading 3% below its year-to-date starting point.

In contrast, the PHLX Semiconductor Index has declined 15% since early July. Software stocks have demonstrated relative strength versus chip manufacturers during this compressed timeframe, though a substantial performance gap persists over extended periods.

The AI investment theme encountered additional complications from forced liquidations at Situational Awareness, an AI-focused hedge fund. These mandatory sales intensified pressure on infrastructure-related stocks during summer months and fueled speculation about value migration toward application-layer companies.

However, current earnings disclosures reveal this narrative lacks uniformity. Even Alphabet has reorganized its AI research division following periods of industry acclaim for its development approach.

Market participants anticipating a comprehensive software sector recovery are discovering the challenge of precise timing. The stark performance contrast between winners like Palantir and underperformers like Datadog illustrates that this segment remains highly uncertain in the current environment.

✨ Limited Time Offer