Jim Cramer: The market has turned against software stocks and this metric explains their downfall

Core Viewpoint - Investors are fleeing from enterprise software stocks due to concerns about artificial intelligence disrupting traditional business models, making it difficult to assess future earnings potential [1][2]. Group 1: Market Sentiment and Valuation - The price-to-earnings (P/E) multiple is crucial for understanding stock valuations, reflecting how much investors are willing to pay for future profits [2]. - Current market conditions show a compression of P/E multiples across software stocks, indicating reduced investor confidence in future growth [2][3]. - ServiceNow exemplifies this trend, experiencing a significant drop in its stock price despite reporting better-than-expected earnings and a substantial buyback [3]. Group 2: ServiceNow's Performance - ServiceNow's stock has decreased approximately 49% over the past year, contrasting with the S&P 500's gain of about 15% during the same period [3]. - The company's P/E multiple has dramatically declined from the upper 60s in January 2025 to just under 28 times forward earnings after recent market reactions [4]. - Despite the market's harsh judgment, there is a belief that ServiceNow will continue to deliver earnings, although this does not currently influence its stock price [5].