Software Was the Market’s Big Laggard This Year. Snowflake’s Blowout Might Be the Spark That Changes That.

Software stocks have had a brutal first five months of 2026, with many of them falling sharply even as the S&P 500 has risen. Snowflake (NYSE: SNOW), despite management describing its artificial intelligence (AI) data cloud as a beneficiary of the AI boom, has seen its shares fall alongside other software stocks this year amid investor concern that AI would disrupt software companies overall. Indeed, at one point in April, the stock sat more than 50% below where it had traded a year earlier. But the stock is rebounding now. In fact, the stock is now up sharply year to date, helped mainly by the market’s reaction to the tech company’s better-than-expected earnings report last week.

But is this news about more than Snowflake? Could there be more software companies that, like Snowflake, will actually benefit more from AI than they will be hurt by it? Snowflake’s latest report is the loudest evidence yet that the market may have had it backward.

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Snowflake reaccelerates

The company’s fiscal first-quarter results (the period ended April 30, 2026) certainly didn’t paint a picture of AI disrupting software. On the contrary, the business saw a significant acceleration.

The company’s fiscal first-quarter product revenue, which accounts for the bulk of its total revenue, rose 34% year over year to $1.33 billion — an acceleration from 30% in fiscal Q4 and 26% in the year-ago quarter. Additionally, management said this was the strongest sequential dollar growth in company history.

Further, Snowflake’s acceleration is happening broadly across its business. Net revenue retention, which measures spending from existing customers against the prior year, ticked up from 125% in the prior quarter to 126%. And the company’s remaining performance obligations (RPO), which represent contracted revenue not yet recognized, grew 38% year over year to $9.21 billion. Additionally, the company added 616 net new customers — up 38% from a year ago.

Profitability is improving alongside the growth. Snowflake’s non-GAAP (adjusted) operating margin expanded to 12% from 9%, and adjusted earnings per share rose to $0.39 from $0.24.

What’s driving the inflection is AI, and not in the way some bears may have feared. Rather than displacing Snowflake’s core platform, AI is pulling more data and more workloads onto it. The company’s newer agentic products — Snowflake Intelligence and its coding agent, Cortex Code — are showing strong traction. And these offerings, in turn, are helping drive greater consumption.

“AI is accelerating the value that people can get from the data that they have put into Snowflake or that they can put into Snowflake,” said CEO Sridhar Ramaswamy in the company’s fiscal first-quarter earnings call.

Confident enough in the demand, management lifted its full-year product revenue guidance to $5.84 billion, or 31% growth, up from prior guidance of $5.66 billion and 27% growth. The company also signed a new $6 billion five-year agreement with Amazon‘s Amazon Web Services and expanded its partnership with OpenAI.

The group is turning — but tread carefully

Snowflake isn’t alone.

Observability specialist Datadog (NASDAQ: DDOG) got there first. Its first-quarter 2026 revenue rose 32% year over year to just over $1 billion — the company’s first billion-dollar quarter — accelerating from 29% in the prior quarter and 25% a year earlier. Datadog raised its full-year outlook, too, and its stock has climbed more than 80% in 2026, trading near a 52-week high. The thesis is similar to Snowflake’s: AI makes software systems more complex, and more complexity means more to monitor.

Database company MongoDB (NASDAQ: MDB) rounds out the picture. Its fiscal first-quarter revenue (the period ended April 30, 2026) rose 25% to $687.6 million, with its cloud database, Atlas, up 29% and now roughly three-quarters of total revenue. MongoDB raised its full-year revenue guidance as well, and shares continued higher the day after the report — a sharp turn for a stock that was down more than 20% earlier in the year.

So, some of the laggards are no longer lagging — and others in the software space may not have fully recovered the year’s losses but have rebounded sharply from their lowest points.

The catch is that the rebound is well along, and the easy gains may already be behind.

For instance, Snowflake’s stock surged about 35% in a single session after the report, its best day ever, and trades near $255 as of this writing — back within reach of its 52-week high after a brutal stretch. Up about 16.5% in 2026, it is now significantly outperforming the S&P 500 year to date.

But the growth stock’s valuation now leaves little slack. Snowflake remains unprofitable on a generally accepted accounting principles (GAAP) basis, with the bottom line still deep in the red. Further, the stock’s price-to-sales ratio now sits at 17 — a steep valuation multiple that assumes the reacceleration holds for years, and that the company is able to begin reporting substantial profits — profits that grow at strong rates for years.

Furthermore, investors should keep in mind that Snowflake’s consumption model can swing both ways: revenue tracks how much customers actually use the platform, so if enterprise AI spending cools later this year, growth could quickly fade without any change in customer count.

Overall, Snowflake’s business looks healthier than it has in a while, and the read-through for software in general is starting to look encouraging. But after a run-up like this, shares of Snowflake (and shares of other software stocks that have sharply rebounded over the last few weeks) simply may no longer be the bargains they were.

Regarding Snowflake stock specifically, I think the recent rebound has already more than priced in the change in sentiment for the company’s future.

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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Datadog, MongoDB, and Snowflake. The Motley Fool has a disclosure policy.

Software Was the Market’s Big Laggard This Year. Snowflake’s Blowout Might Be the Spark That Changes That. was originally published by The Motley Fool