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Yunyao (NET) is down 26% from its November high. Cloudflare forecasts sales of $2.79-2.80B in 2026, compared with analyst estimates of $2.74B.
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Cloudflare secured a $130 million five-year contract and a $42.5 million annual deal, driven by demand for artificial intelligence.
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Microsoft (MSFT) fell 12% after Q2 earnings as capital spending on artificial intelligence infrastructure hit $37.5B.
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The software industry has undergone a dramatic reversal from a must-have industry to one where investors are fleeing en masse on fears that advances in artificial intelligence (AI) will upend traditional business models.
The trading volume is iShares Expanded Technology Software Sector ETF (CBOE:IGV) surged to near-record levels on Friday, with volume approaching $11 billion, approaching the record of $13.2 billion set on February 6 and nearly double the 2021 high of $5.8 billion. This panic selling resulted in an indiscriminate sell-off of stocks — even those with solid fundamentals — that wiped out more than $1 trillion in market value from the industry in early February alone.
Amid this exodus, durable companies like this Yunyao (NYSE: NET) and Microsoft (NASDAQ: MSFT ) is like the baby being thrown out with the bathwater. They represent a significant buying opportunity, as both can benefit from artificial intelligence rather than succumb to it.
Cloudflare shares are down 26% from their November highs, in line with a broader rout in the software industry. The decline was exacerbated by a major network outage that month that disrupted access to platforms such as X and ChatGPT, raising concerns about customer retention and operational reliability. Additionally, the stock has faced pressure from an overvalued valuation, trading at 24 times the year’s revenue before the sell-off, as investors worry that artificial intelligence agents could commoditize edge computing services. Despite these headwinds, Cloudflare is poised to survive and thrive as it plays an integral role in supporting AI-driven workloads.
The company’s fourth-quarter results beat expectations, with revenue growth driven by record annual contract values related to artificial intelligence needs, including a five-year contract worth $130 million and an annual contract worth $42.5 million. Cloudflare expects sales in 2026 to be between US$2.79 billion and US$2.8 billion, exceeding analysts’ forecast of US$2.74 billion, mainly due to the rapid development of artificial intelligence technology, increasing demand for its cloud services.
AI is a tailwind for Cloudflare by increasing traffic, application and security needs rather than disrupting its core infrastructure. The company’s globally distributed edge network delivers low-latency, secure inference that is essential for artificial intelligence agents such as Anthropic selectionClaude Code and Cowork, positioning it as a “Tier 1 AI Winner.”
A January report highlighted that organizations that use Cloudflare tools to modernize applications are three times more likely to realize ROI on AI, with 93% of leaders believing software updates are key to enhancing AI capabilities. Strategic partnerships with major AI companies and record-breaking DDoS mitigation efforts further strengthen its competitive advantage. High switching costs and enterprise integration also provide a moat, while the proliferation of AI agents and IoT devices drives continued demand for its zero-trust cybersecurity and connectivity solutions.
As AI re-platforms the internet, Cloudflare’s infrastructure becomes indispensable, supporting long-term revenue stability and customer retention.
Microsoft’s stock price has fallen 18% so far this year, and after the second fiscal quarter earnings report was announced on January 29, the stock price fell sharply by 12%. The decline stemmed from investor concerns about rising capital expenditures, which hit $37.5 billion in the quarter as the company ramped up investment in artificial intelligence infrastructure. Due to these costs, operating margins fell to 45.1%, while Azure cloud growth remained stable at 37% to 38%, but faced capacity constraints from the AI chip shortage.
Its heavy reliance on OpenAI, which accounts for 45% of Microsoft’s $625 billion remaining performance obligations, amplified the risk of overreliance on a single partner, while broader industry concerns about AI upending software models led to the sell-off. Microsoft is also the largest component of the iShares Software ETF.
However, Microsoft’s fundamentals enable it to continue to grow and expand in the age of artificial intelligence. Second-quarter revenue reached $81.3 billion, driven by growth in its intelligent cloud business as enterprises migrated legacy SQL and on-premises workloads to Azure. While AI spending has put pressure on near-term profits, these migrations provide a stable revenue base, and Azure is expected to maintain 30% medium-term growth.
The tech giant expects annual capital spending on data centers and artificial intelligence chips to reach $27 billion to $29 billion, but that supports long-term scalability. Early monetization of tools like Copilot shows the potential for productivity gains, with 2026 seen as an inflection year for AI returns.
Microsoft’s transformation into an AI-first entity has strengthened its cloud dominance, and explosive growth in AI adoption is driving demand for secure infrastructure. The stock trades at a higher price, but its diverse product lineup protects against disruption. As AI integrates across industries, Microsoft’s Azure and partnerships enable it to achieve continued growth, outperforming industry peers in scale and innovation.
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