Key Highlights

● ServiceNow had its worst day on record despite beating Revenue estimates.

● Fortinet cut its full-year service revenue forecast to $5.15 billion to $5.17 billion.

● Selling spread to Salesforce, Palo Alto Networks, CrowdStrike, Zscaler and Snowflake.

● The Nasdaq Composite fell 365.13 points while more than 400 S&P 500 members rose.

Two of enterprise technology's biggest names suffered dramatic drops on Thursday, dragging the software sector into a rough session.

A sector-wide hit

The iShares Expanded Tech-Software Sector ETF, known by its ticker IGV, sank on Thursday, with market data showing a steep decline. The damage was led by ServiceNow (NYSE:NOW) and Fortinet (NASDAQ:FTNT), which reported results Wednesday evening and were among the S&P 500's biggest losers.

One estimate suggested the software and IT services group fell sharply as a whole, and the selling spread to Salesforce (NYSE:CRM), Palo Alto Networks (NASDAQ:PANW), CrowdStrike (NASDAQ:CRWD), Zscaler (NASDAQ:ZS) and Snowflake (NYSE:SNOW).

ServiceNow's record drop

ServiceNow had its worst day on record, according to media reports, closing at $109.67 after a prior close of $150.13, figures that reflect its recent 5-for-1 stock split.

The quarter itself was not a disaster. Revenue of $4.11 billion beat the $4.09 billion estimate, and subscription revenue reached $3.99 billion. ServiceNow even raised its full-year subscription revenue outlook to $15.78 billion to $15.79 billion.

But adjusted Earnings of $1.00 a share fell just short of the $1.02 forecast, ending a six-quarter beat streak. More important, the company guided to slower growth in current remaining performance obligations, a key measure of contracted future revenue, than analysts expected. For a subscription business, that metric is a window into the future.

One brokerage reaffirmed its Overweight rating and $175 price target, according to market data.

Fortinet's guidance cut

Fortinet, the Cybersecurity firm, closed at $139.10, according to media reports. Its headline numbers beat estimates, but the details worried investors. Product revenue growth slowed sharply to $765 million, and service revenue of $1.313 billion grew more slowly than expected. Non-GAAP gross Margin also contracted.

The biggest blow was a cut to the full-year service revenue forecast, to $5.15 billion to $5.17 billion, even as the company raised its overall sales forecast. A brokerage downgraded the stock to Neutral with a $140 target, while other brokerages cut their price targets.

The contagion

The damage spread quickly. Salesforce fell amid the software selloff and scrutiny of its planned $5.66 billion deal for Braze (NASDAQ:BRZE), according to one report. Palo Alto Networks and CrowdStrike dropped sharply early, according to market commentary, as AI-disruption worries resurfaced. Zscaler opened sharply lower before recovering much of the loss.

Not every software name was caught in the downdraft. Tenable (NASDAQ:TENB) beat on revenue, Operating Income and free Cash Flow and raised its full-year guidance, according to another source.

Software in the AI crosshairs

Thursday's software slide came alongside a broader reckoning for AI-exposed stocks. Alphabet (NASDAQ:GOOGL) suffered its worst day since its 2004 IPO, and the Nasdaq Composite fell 365.13 points to 26,184.72. One market strategist said that "markets are no longer rewarding companies simply for investing heavily in AI."

The broader market fared better. The S&P 500 slipped just 23.59 points to 7,720.39 as more than 400 of its members rose, and the Russell 2000 gained 28.71 points to 2,859.22. Money flowed into health care, real estate and utilities.

What to watch

The key question for software is whether ServiceNow and Fortinet signal a broader slowdown or company-specific issues. Upcoming reports from other enterprise software firms will help answer it.

For ServiceNow, investors will watch whether its subscription Backlog growth stabilizes. For Fortinet, the focus is whether service revenue reaccelerates. More broadly, the debate over whether AI tools threaten traditional software businesses is likely to keep the sector volatile. After Thursday, IGV will need convincing evidence to regain its footing.