Concerns about AI impacting the software industry are intensifying! ServiceNow (NOW.US) stock price plummeted by more than 24%, Wall Street banks are strong: business growth momentum is still strong

The Zhitong Finance App learned that on Thursday, the stock price of enterprise software giant ServiceNow (NOW.US) plummeted by more than 24%, mainly because the company announced some key business indicators for the fourth quarter fell short of market expectations, once again raising investors' concerns that artificial intelligence (AI) might impact the traditional software industry. However, Bank of America and J.P. Morgan analysts are optimistic about the company's long-term outlook, believing that its AI business is still growing strongly, and that short-term performance fluctuations have not changed the fundamentals.

ServiceNow's third-quarter revenue exceeded expectations, but profit was slightly lower than market estimates

Financial reports show that for the third quarter ending September 30, ServiceNow's revenue increased 20.5% year over year to US$4.11 billion, higher than analysts' expectations of US$4.09 billion. Adjusted earnings per share were $1, slightly below market expectations of $1.02.

As an important measure of future revenue growth, the company's current remaining performance obligation (CrPO) reached US$13.65 billion, an increase of 20% year over year, higher than market expectations of US$13.57 billion. At a fixed exchange rate, CrPO increased 21% year over year, exceeding Wall Street's estimate of 19.7%. Meanwhile, ServiceNow's third-quarter operating margin performance was strong, 130 basis points higher than market expectations of 32.5%.

Despite solid overall results in the third quarter, the outlook for some of the company's key growth indicators for the fourth quarter disappointed investors. ServiceNow predicts that subscription revenue for the fourth quarter will be between US$4.25 billion and US$4.26 billion, higher than market expectations of US$4.24 billion; annual subscription revenue is expected to be US$15.78 billion to US$15.79 billion, which also exceeds market expectations of US$15.76 billion.

However, the growth rate guidelines for CrPO and subscription revenue for the fourth quarter were 120 basis points and 40 basis points lower than market expectations, respectively, which was the main reason for the sharp drop in stock prices.

Bank of America: AI business is growing strongly, but short-term guidance is still questionable

Bank of America analyst Tal Liani maintained ServiceNow's “buy” rating with a target price of $180. Liani pointed out that ServiceNow's overall performance in the third quarter was steady. CRPO growth and operating profit margins were better than market expectations, but growth guidance for the fourth quarter fell short of expectations, weakening investor confidence. In particular, he emphasized that the company's AI business is still showing strong growth momentum.

In the third quarter, ServiceNow's AI business added a 65% year-on-year increase in net annual contract value (NNACV), driving management to raise the AI business annual contract value (ACV) forecast for the full year 2026. However, Liani said that although management attributed the weakness in the fourth quarter guidance to differences in accounting processing and revenue recognition time, he did not fully agree with this explanation.

Despite this, he is still optimistic about ServiceNow's long-term prospects. He believes that there is clear evidence of AI business growth, and current fluctuations in some indicators reflect more short-term challenges in the company's business expansion process.

J.P. Morgan raised its target price to $160, optimistic about the long-term potential of the AI business

J.P. Morgan analyst Samik Chatterjee maintained ServiceNow's “overweight” rating and raised the target price from $150 to $160. Chatterjee believes that ServiceNow's current financial report and performance outlook are complicated and have failed to fully convince investors that the company's growth momentum can continue.

However, he pointed out that part of the reason for the slowdown in CrPO growth in the fourth quarter was that the statistical range of relevant indicators changed, and the correlation between cRPO and subscription revenue growth in the future may no longer be as close as in the past.

Judging from actual business performance, ServiceNow still shows many positive signals. First, in the third quarter, CrPO calculated at a fixed exchange rate increased 21% year over year, higher than the company's previous guideline of about 20%. Of these, about half of the excess was due to actual business performance being better than expected, while the other half was driven by customers renewing their contracts early.

Second, AI business growth continues to accelerate. ServiceNow raised the AI business ACV target by 200 million US dollars by the end of 2026, from the previous 1.5 billion US dollars to 1.7 billion US dollars.

Furthermore, the number of the company's large customers continues to grow. The number of customers with annual contracts worth over $5 million reached 680, up from 658 in the second quarter and 553 in the same period last year.

The average annual contract value for these large customers also increased further from $14.6 million in the third quarter of last year and $15.2 million in the second quarter of this year to $15.4 million.

Chatterjee pointed out that ServiceNow is currently helping customers deploy high-value AI application scenarios through professional services. This strategy temporarily shifts part of the revenue from subscription revenue to professional services revenue. Although it will not change the overall revenue received by the company, it may affect the performance of subscription revenue and CrPO indicators in the short term.

He believes that as customers gradually expand the scale of AI product usage with professional service support, related investment is expected to translate into stronger subscription revenue growth in the future.

Although the company expects the CRPO growth rate to slow in the fourth quarter and face additional pressure in the 2027 fiscal year, J.P. Morgan believes that ServiceNow's implied year-on-year revenue growth rate for the fourth quarter is still around 20%, and the initial forecast growth rate of about 19% for fiscal year 2027 also indicates that its basic business is still steady.

Notably, this 2027 growth estimate does not fully account for additional contributions that may be brought about by the accelerated increase in AI adoption.

Overall, ServiceNow's financial report reflects an important contradiction currently facing the software industry. Although AI products are creating new revenue growth opportunities, the revenue structure, contract indicators, and growth models of traditional software companies are also changing.

For investors, short-term growth guidance falls short of expectations, raising concerns about AI impacting the software business model; while some Wall Street analysts believe that ServiceNow's continued growth in AI contract value and large customer expenses indicates that the company is still expected to benefit from the popularity of enterprise AI applications.