Why Microsoft Stock Sank Today
Key Points
Microsoft lost ground today as investors sold out of software stocks.
ServiceNow recently posted solid Q1 results, but investors saw potential problem points that caused a flight from the tech sector.
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Microsoft (NASDAQ: MSFT) stock closed out Thursday's trading in the red amid bearish momentum for software companies. The tech giant's share price ended the day down 4%. The S&P 500 closed out the session down 0.5%, and the Nasdaq Composite was down 0.9%.
Microsoft and other high-profile software stocks faced pressure today as investors had a strong negative reaction to ServiceNow's first-quarter results. With the pullback, Microsoft's share price is now down 14% year to date and 23% from its hight.
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ServiceNow's Q1 results spurred big sell-offs for tech stocks
The question of whether new artificial intelligence (AI) applications will disrupt traditional software-as-a-service (SaaS) leaders has been a key debate shaping valuation trends in the market this year, and ServiceNow's Q1 report was set up as an important indicator for the outlook for software companies. When it comes to reading the tea leaves on the outlook for SaaS stocks, ServiceNow delivered quarterly results that were at worst inconclusive. That didn't stop the stock from closing out the day's trading with its worst-ever historical drop, and the bearish momentum extended to Microsoft and other tech players.
What do ServiceNow's results mean for Microsoft?
Despite the historic sell-off for ServiceNow stock creating bearish ripple effects that extended through the broader tech industry, the company's Q1 results and forward guidance were far from bad. ServiceNow's non-GAAP (adjusted) earnings of $0.97 per share topped the average analyst estimate's call for per-share earnings of $0.96, but overall revenue of $3.77 billion topped Wall Street's forecast by roughly $20 million.
ServiceNow's Q1 report looked solid, but guidance for gross margin of 81.5% for this year fell short of Wall Street's target for a gross margin of 82.2%. While ServiceNow's gross margin forecast could be interpreted as a sign of weakening pricing power in the software space, the pullback for the company's stock and Microsoft stock could be an overreaction.
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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and ServiceNow. The Motley Fool has a disclosure policy.
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