Written by Ralph Sun
In the current market environment, artificial intelligence is generally viewed as an unequivocal catalyst for software stocks. Mentioning “AI” on an earnings call has frequently been sufficient to trigger a double-digit rally. However, on May 8, 2026, the market violently demonstrated that the transition to the AI era is not without severe growing pains.
Two major software companies, Cloudflare (NET) and HubSpot (HUBS), both delivered first-quarter earnings that beat Wall Street’s expectations. Yet, both stocks suffered catastrophic sell-offs, plunging 24% and 20%, respectively. The culprit? The messy, disruptive reality of restructuring business models for an AI-first world.
Cloudflare’s Proactive Amputation
Cloudflare’s first-quarter results were objectively strong. The web security and infrastructure company reported adjusted earnings of $0.25 per share on revenue that jumped 34% year-over-year to $639.8 million, beating the analyst consensus [1]. Management even raised its full-year revenue and profit forecasts.
Normally, this profile would result in a substantial rally. Instead, the stock plummeted from a record high of $257 to roughly $195 [1]. The catalyst for the crash was the simultaneous announcement that Cloudflare is laying off 1,100 employees, representing 20% of its global workforce [2].
Crucially, the company stated this was “not a cost-cutting exercise.” Rather, it is a fundamental restructuring driven by the fact that the company’s internal use of AI has grown by more than 600% in just three months [1]. Management explicitly stated they are being “intentional in how we architect our company for the agentic AI era” [1].
The market, however, interpreted the massive layoff as a red flag. Analysts at William Blair suggested the move raised fears of impending “top-line deceleration” [1]. Investors panicked, assuming that a company cutting 20% of its staff must be facing severe underlying demand issues.
Thesis on NET: BUY
The 24% sell-off is a gross overreaction and a fundamental misinterpretation of management’s strategy. Cloudflare is aggressively adopting AI to drive massive internal efficiencies before its competitors do. The fact that they raised full-year guidance while executing this restructuring proves that demand remains robust. This is not a distressed company slashing costs to survive; it is a healthy company using AI to dramatically expand its operating margins. The market’s panic has created a phenomenal entry point for long-term investors who understand the margin implications of an AI-optimized workforce.
HubSpot’s Agentic Growing Pains
HubSpot experienced a nearly identical paradox. The marketing and customer relationship software firm reported Q1 revenue growth of 23.4% to $881 million, while adjusted earnings per share skyrocketed 52.8% to $2.73 [3]. Both metrics solidly beat expectations.
Yet, the stock plunged 20.1% to roughly $185 [3]. The sell-off was triggered by forward guidance that was only slightly softer than expected. Management guided for Q2 revenue of $897 million to $898 million (18% growth), which was just below the $902 million consensus [3].
The underlying reason for the softer guidance is what truly spooked the market. HubSpot is in the midst of transitioning its product suite to feature “agentic AI” offerings—autonomous AI agents that can execute complex marketing tasks. To drive adoption, CFO Kathryn Bueker revealed the company lowered pricing on these new agentic offerings in April and began offering 28-day free trials [3]. Furthermore, the company’s sales force had to pause selling to undergo extensive training on the new products and usage-based payment models [3].
Thesis on HUBS: HOLD
HubSpot is a victim of the “SaaS-pocalypse”—a broader market fear that AI will disrupt traditional software-as-a-service business models. By lowering prices and offering free trials for its AI agents, HubSpot is making the correct long-term strategic move to capture market share in the new agentic era. However, this transition will undoubtedly create near-term friction in revenue growth.
While the stock now trades at a seemingly cheap 15.7 times this year’s adjusted earnings estimates [3], the uncertainty surrounding the monetization of agentic AI will likely keep the stock range-bound. Investors should hold existing positions but wait for clear evidence that the new usage-based pricing models are gaining traction before adding capital.
The New Software Reality
The May 8 trading session established a new paradigm for software investors. Beating quarterly earnings is no longer sufficient. The market is now ruthlessly evaluating how software companies are managing the transition to artificial intelligence.
Companies like Datadog (DDOG), which recently surged 31% by proving that AI is accelerating customer spend, are being rewarded with premium multiples. Conversely, companies like Cloudflare and HubSpot, which are undergoing the messy, disruptive process of internal restructuring and pricing model transitions, are being violently punished.
The paradox is that the companies being punished today are making the exact structural changes necessary to thrive tomorrow. Cloudflare’s proactive workforce optimization and HubSpot’s aggressive push into agentic AI will ultimately result in higher margins and deeper customer integration. The market’s inability to look past the immediate disruption has created compelling opportunities for investors willing to endure the volatility of the AI transition.
References
[1] Yahoo Finance. “Cloudflare Says It Plans to Cut 20% of Staff as AI Reshapes Work; The Stock Is Plunging.” https://finance.yahoo.com/markets/stocks/articles/cloudflare-says-plans-cut-20-164337766.html
[2] American Bazaar Online. “Cloudflare cuts 1100 jobs as CEO calls layoffs ‘right decision’.” https://americanbazaaronline.com/2026/05/08/cloudflare-cuts-1100-jobs-as-ceo-calls-layoffs-right-decision-480389/
[3] The Motley Fool. “Why HubSpot Plunged Today.” https://www.fool.com/investing/2026/05/08/why-hubspot-plunged-today/
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Disclaimer: This article is for informational purposes only and does not constitute investment advice. The opinions expressed are those of the author and do not reflect the views of Equities Orbis or its affiliates. Always conduct your own research and consult a licensed financial advisor before making investment decisions.
