The Daily Breakdown dives into ServiceNow, which despite beating on earnings, tumbled after its report and weighed on software stocks.
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Deep Dive
Just when it looked like the worst may be behind it, shares of ServiceNow tumbled 17.6% on Thursday. Despite beating earnings and revenue estimates and raising full-year guidance, investors punished the stock amid ongoing concerns that its moat could be eroded by AI. That fear is not unique to ServiceNow — the broader software space pulled back on Thursday, with many names still well below their 52-week highs even as the Nasdaq 100 has returned to record highs. So what’s the deal?
ServiceNow sells cloud software that helps enterprises digitize and automate workflows across IT, customer service, HR, security, and other back-office functions through its Now Platform. It is increasingly embedding AI into that platform through Now Assist and newer AI agents, which can power search, summaries, recommendations, conversational support, and more autonomous task execution inside existing workflows.
Despite the noise, ServiceNow continues to deliver solid growth, with revenue, operating income, free cash flow, and margins all moving in the right direction.
Future Growth Projections
Even with the company’s strong track record and impressive growth expectations over the next several years, investors remain uneasy about the potential disruption from AI. It creates a classic Wall Street conundrum: Is this simply an overreaction to an unfounded fear, or are sellers correctly getting ahead of a long-term problem?
According to Bloomberg, analysts project the following:
- Earnings Growth: 19.3% in 2026, 20.1% in 2027, and 18.7% in 2028
- Revenue Growth: 20.9% in 2026, 21.6% in 2027, and 18.3% in 2028
Analysts currently have a consensus price target of ~$149 on NOW stock, implying about 74% upside to today’s stock price.
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Diving Deeper — Valuation
Because ServiceNow’s business continues to grow while the stock continues to fall, the valuation has become far more approachable. In fact, on both a price-to-earnings and price-to-free-cash-flow basis, it has never been lower:
Risks
In Q1, we took a Deep Dive into software stocks and discussed the impact AI is having on the group. While many of these firms may have defensible moats — and while many may ultimately benefit from AI — one of the biggest risks is valuation compression. Put another way, a major re-rating across the industry can weigh on stock prices even when the underlying businesses are still performing reasonably well.
ServiceNow is also not insulated from broader economic or macro-related pressures. Case in point: the company said geopolitical turmoil in the Middle East delayed several large on-premise deals in Q1. While some of those deals have since closed in the first few weeks of Q2, the disruption delayed roughly $200 million in revenue last quarter.
The Bottom Line
ServiceNow’s underlying business continues to show solid growth, and the stock’s valuation has become notably more reasonable after a steep decline of roughly 50% over the past year. At the same time, improving valuation and strong fundamentals alone do not guarantee the stock has bottomed, particularly as investors continue to weigh AI-related disruption risk, broader software re-rating pressures, and macro uncertainty.
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.
