Is the Market Mispricing ServiceNow's AI Future?

A 17-year investing experiment investigated in Dublin (From Porter & Company)

There are few better examples of a gap between a company's performance and its share price right now than ServiceNow Inc. (NYSE: NOW). The enterprise software giant has spent a year selling off on fears that artificial intelligence will eventually make its business obsolete, and yet the numbers it just delivered tell a completely different story.

Last week, the company reported second-quarter results that comfortably beat expectations, with revenue growing at a rapid clip and management confident enough to raise its full-year outlook. Despite that, the stock barely moved and is trading just above its pre-earnings level, while still deep in the red for the year, weighed down by a narrative that its own results keep contradicting.

For investors willing to look past the fear, however, that disconnect may be creating one of the more interesting opportunities in enterprise software.

The Fear Weighing on the Stock

To understand the opportunity, it helps to understand the fear. Like with many traditional software stocks, ServiceNow has been caught up in the software sector's "existential AI problem"—the worry that AI agents will eventually do the work software handles today, reducing the need for the companies that make it.

It's the same anxiety that has hammered enterprise software valuations across the board this year, and on paper, ServiceNow looks like an obvious target. Much of its business has historically been sold on a per-seat basis, exactly the model the bears argue is most exposed to AI disruption. That fear has pushed the stock sharply lower over the course of the year, even as the underlying business has continued to grow.

What the Report Actually Showed

The thing is, though, rather than showing any sign of core demand evaporating, ServiceNow's latest results pointed in the opposite direction. Revenue grew more than 24% year-over-year, its fastest pace in more than two years, and management made it clear with raised forward guidance that they’re expecting this momentum to stick around.

These metrics would be flashing red if AI were truly eroding the business, as the bears have been saying. Instead, ServiceNow’s large deal activity actually accelerated, with a sharp year-over-year increase in the number of major new contracts signed, and customer renewal rates remained near the very top of what any software company could hope for.

Perhaps most importantly, ServiceNow's own AI offerings crossed a major milestone during the quarter, passing $1 billion in annual contract value. As we’ve seen with some of its peers, ServiceNow is far from a victim of AI; it has actually been quietly becoming one of its beneficiaries.

Why AI May Be an Opportunity, Not a Threat

This gets to the heart of why the disruption thesis may have it backward. Rather than being displaced by AI, ServiceNow is steadily shifting its model to sell it, moving from purely per-seat pricing toward a consumption-based approach that charges for the AI work its platform performs.

That's a crucial distinction. Under a consumption model, the more AI-driven work customers run through the platform, the more ServiceNow earns, which turns the very technology that bears fear into a fresh growth engine. Instead of AI shrinking the amount customers pay ServiceNow, it could expand it, and early adoption figures suggest that shift is already gaining real traction.

In that context, the question is no longer whether ServiceNow can survive the rise of AI agents, but how much additional revenue it can generate by powering them.

What It Means for the Stock

For all those promising signs, however, the market has been slow to update its view. The stock sold off in the aftermath of last week’s report, but is already up nearly 15% from those lows, and, importantly, above its pre-earnings level.

That’s a promising sign for those of us willing to lean into the bullish thesis, as is the fact that the analyst community certainly hasn't lost faith. Following the results, the likes of Evercore, UBS Group and Sanford Bernstein all reiterated bullish ratings, and the stock carries a healthy consensus rating of Moderate Buy on MarketBeat.

Indeed, some of the recently refreshed price targets are nearly reason enough to consider getting involved, like UBS Group’s $248 target, which implies as much as 125% upside from current levels. For those looking to get in on the ground floor of what could be the mother of all comebacks, this is what an entry opportunity looks like.

Read this article online ›