Enterprise software stocks, left for dead in the first four months of 2026, are staging a comeback as strong earnings from sector leaders challenge the prevailing narrative that artificial intelligence would decimate their business models. The iShares Expanded Tech-Software Sector ETF (IGV) has jumped 12% in May, a sharp reversal from the 21% decline it suffered through April while semiconductor ETFs soared.
"The rebound is a correction from an overblown selloff," Jefferies software analyst Brent Thill said, noting that big fund managers are still largely sticking with AI infrastructure plays.
The facts on the ground changed with recent earnings reports. Atlassian Corp. (NASDAQ: TEAM) saw its stock surge nearly 30% after reporting fiscal Q3 revenue growth of over 30% and revealing its AI-powered Rovo users generate more than double the annual recurring revenue (ARR) of non-users. Similarly, Datadog Inc. (NASDAQ: DDOG) crossed $1 billion in quarterly revenue for the first time and saw its stock soar more than 30% after its Q1 2026 results.
The resilience of these firms puts the software sector at a crossroads, testing the long-term viability of the traditional "per-seat" revenue model against a future where AI could be a significant growth driver rather than a headwind. With major players like Salesforce Inc. (NYSE: CRM) reporting earnings next week, investors are watching closely to see if the rebound has legs, even as the software ETF remains down more than 10% over the last 12 months.
AI Fears Fail to Materialize in Earnings
The primary thesis for bearish software investors was that new AI agents would allow customers to build their own tools, gutting the lucrative per-seat license model. While some companies, like Palantir, claim to be doing just that, the broader trend seen in recent earnings reports points in the opposite direction.
Atlassian was a prime example of a company supposedly at risk. Its stock is down nearly 60% over the last year amid these concerns. However, its fiscal Q3 2026 earnings blew past estimates, with EPS beating consensus by over 20%. The key driver was the adoption of its AI assistant, Rovo. The revelation that Rovo clients produce more than double the ARR of other customers suggests AI is a powerful upsell tool, not a replacement for core software. The stock, which now trades above its 50-day moving average for the first time in 2026, is showing signs of a technical turnaround, supported by a bullish crossover on its MACD indicator that began forming in February.
Datadog Hits New Highs on Infrastructure Demand
While Atlassian is rebounding from deep lows, Datadog is a software company already hitting new all-time highs in 2026. The cloud monitoring firm’s Q1 earnings eased any concerns about AI cannibalizing sales. The company reported over 4,500 customers with an ARR of $100,000 or more, an increase of over 20% year-over-year, as hyperscalers and other large enterprises outsource their AI model training environments.
This intense demand for AI infrastructure is creating shortages across the entire technology stack, a fact highlighted by Nvidia CFO Colette Kress, who revealed rental prices for even its older A100 and H100 GPUs climbed 15% to 20% in 2026. For Datadog, this environment is creating a massive, resilient revenue stream. The stock is now forming a "Golden Cross," a technical signal where the 50-day moving average crosses above the 200-day moving average, which could attract further algorithmic buying and push the stock even higher.
This article is for informational purposes only and does not constitute investment advice.
