Merlin Labs Stock Drops 14.7% After Q1 Earnings Miss

Merlin Labs stock declined 14.7% in after-hours trading on Monday, 25 May 2026, following a first-quarter earnings report that missed Wall Street expectations. The AI infrastructure firm reported adjusted earnings per share of $0.28, falling short of the consensus estimate of $0.35. Revenue for the quarter reached $132.4 million, a figure that also disappointed analysts who had projected $142 million. Finance.yahoo.com reported the market reaction and earnings details on 25 May 2026. The sell-off erased approximately $1.8 billion from the company's market capitalization as shares dropped to $18.45.

Context — [why this matters now]

The current macro environment pressures high-growth technology stocks reliant on capital expenditure for expansion. The 10-year U.S. Treasury yield sits at 4.31%, maintaining a valuation headwind for long-duration assets. A comparable event occurred in February 2025 when C3.ai’s stock fell 22% after a guidance cut, highlighting the market's severe punishment for decelerating growth narratives in the AI software sector. The immediate catalyst for Merlin Labs was a specific shortfall in its high-margin software licensing segment, which grew only 15% year-over-year versus the 30% growth projected by several analysts. This slowdown triggered a broader reassessment of the firm's ability to monetize its core AI training and inference platforms amid rising competition.

Data — [what the numbers show]

Merlin Labs reported Q1 revenue of $132.4 million, representing year-over-year growth of 28%. This growth rate decelerated from the 45% pace recorded in the same quarter last year. The firm's adjusted operating margin compressed to 11%, down from 16% in the prior-year period. The company revised its full-year revenue guidance downward to a range of $580-$610 million, from a prior range of $620-$650 million. The new EPS guidance is $1.20-$1.40, down from $1.50-$1.70. In contrast, the Nasdaq Composite Index is up 8% year-to-date, while the iShares Expanded Tech-Software ETF (IGV) has gained 5%. The following comparison illustrates the guidance revision's magnitude.

Metric	Previous Guidance (FY 2026)	New Guidance (FY 2026)	Change
Revenue	$620M - $650M	$580M - $610M	-6.5% at midpoint
Adjusted EPS	$1.50 - $1.70	$1.20 - $1.40	-20% at midpoint

Analysis — [what it means for markets / sectors / tickers]

The earnings miss creates second-order effects across the AI infrastructure ecosystem. Direct competitors like DataRobot and C3.ai may face increased scrutiny, with potential downside pressure of 5-10% as investors reprice growth assumptions. Conversely, providers of commoditized cloud compute, such as Google Cloud and Microsoft Azure, could see a neutral to positive effect as enterprise clients may prioritize foundational infrastructure over specialized software. A key risk to this analysis is that Merlin's issues are company-specific, related to sales execution rather than a broader sectoral downturn. Institutional flow data from the session showed elevated short interest in MRLN ahead of the report, and the subsequent drop triggered covering activity in related AI software shorts while new short positions were initiated in smaller-cap peers.

Outlook — [what to watch next]

Two immediate catalysts will determine the stock's near-term trajectory. The next Federal Open Market Committee meeting on 18 June 2026 will set the tone for risk assets, with any hawkish shift likely amplifying selling pressure on growth stocks. Merlin Labs' next earnings report is scheduled for 24 July 2026, where management must demonstrate a credible path to re-accelerating software revenue. Technical levels to monitor include the 200-day moving average at $19.80, which now acts as resistance, and the psychological support level at $17.00, last tested in November 2025. If the company announces a major partnership or contract win before the July earnings, it could stabilize the share price above the $18 support zone.

Frequently Asked Questions

What does Merlin Labs' earnings miss mean for retail investors?

For retail investors, the 14.7% drop underscores the volatility inherent in growth-stage technology stocks, particularly those in the competitive AI sector. It highlights the importance of scrutinizing a company's specific revenue composition, not just top-line growth. The guidance cut suggests execution challenges that may take multiple quarters to resolve, making the stock a higher-risk proposition in the near term. Investors with long-term horizons should monitor customer acquisition costs and renewal rates in upcoming reports.

How does Merlin Labs' performance compare to other AI stocks this earnings season?

Merlin's performance contrasts sharply with sector leader Nvidia, which beat expectations and raised guidance last week, sending its stock up 8%. However, it aligns more closely with recent weakness in enterprise-focused AI software firms. This divergence indicates a market that is rewarding tangible hardware demand and commoditized compute, while punishing perceived softness in application-layer monetization. The split suggests a maturation phase within the AI investment theme.

What is the historical context for a guidance cut of this magnitude?

A 20% cut to EPS guidance is significant but not unprecedented for a growth stock. In the tech sector, similar guidance reductions by companies like Snap Inc. in 2022 and Unity Software in 2023 led to immediate sharp declines of 25-35%, followed by extended periods of consolidation. Recovery to previous highs typically required 4-6 quarters of consecutive beats and revised growth narratives, often contingent on new product cycles or market expansion.

Bottom Line

Merlin Labs' earnings report signals a material slowdown in its core software business, challenging its premium valuation.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.