ServiceNow, Fortinet Q3 earnings reports lead software stocks lower as outlooks disappoint

What happened: The broader software sector declined on Thursday, led by ServiceNow ( NOW ) stock, which plummeted more than 25% after the company's fourth quarter outlook fell just short of estimates, rekindling fears that AI competition could pressure its software business.

Fortinet ( FTNT ) stock also tumbled as much as 22% after the cybersecurity company released its Q3 results. Peers CrowdStrike ( CRWD ), Okta ( OKTA ), and Palo Alto Networks ( PANW ) all declined more than 6%.

What's behind the move: ServiceNow's current remaining performance obligations (CRPO), or revenue it projects in the coming months, are expected to rise 18.5%, versus 19.4% expected by Wall Street.

ServiceNow CFO Gina Mastantuono pushed back on investors' reaction to the metric in light of overall results.

"CRPO, while it's a good metric that talks about what next year's revenue will look like, it's not perfect. It's a nuanced accounting metric that doesn't necessarily capture all of the momentum in the business," she told Yahoo Finance on Thursday.

Wall Street remained mostly optimistic about the stock. Oppenheimer analyst Brian Schwartz argued that the company's adoption numbers show it isn't being disrupted by AI, even if growth isn't speeding up just yet

"In our view, ServiceNow's AI momentum counters a disruption thesis, although it doesn't establish a clear path to organic reacceleration," Schwartz wrote, advising clients to buy the post-earnings dip. The analyst has a Buy rating and a $165 target on the stock.

Meanwhile, Fortinet's third quarter results beat estimates, but its full-year service revenue forecast was lowered to $5.15 billion to $5.17 billion, down from its previous guidance of $5.18 billion to $5.22 billion and below Wall Street estimates of $5.2 billion, according to Bloomberg data.

"Fortinet's cut to service revenue guidance implies lower attach rates from bundled networking and secure access service edge offerings on its firewall platform," Bloomberg Intelligence analysts noted.

Following the results, Wall Street analysts lowered their valuations on the stock, with BofA cutting Fortinet to Neutral and setting a price target of $140 per share.

Mizuho Securities decreased its price target from $160 to $118, while Piper Sandler analysts slashed their target from $175 to $140.

What else you need to know: Cybersecurity stocks have been major beneficiaries of the AI trade in recent weeks as the use of agents skyrockets, raising demand for security and authentication measures.

Ines Ferre is a Senior Business Reporter for Yahoo Finance covering the US stock market, publicly traded companies, and commodities.