Overview
Based in Santa Clara, California, ServiceNow (NOW) is one of the largest enterprise software companies in the world. At its core, ServiceNow is a workflow automation company that builds cloud software that helps large companies handle the stuff that usually eats up hours of employee time, like IT tickets, HR requests, customer service cases, and finance approvals, by automating it all instead of leaving it to people manually jumping between multiple different systems. As a result, it now stands as one of the more embedded pieces of software inside corporate America, with roughly 90% of the Fortune 500 running on its platform (ServiceNow Q2 2026 investor presentation). More recently, the company has been leaning hard into AI agents, betting that AI agents will become the layer businesses use to connect and manage AI across the systems they already run, rather than ripping everything out and starting over.
Investment Thesis
Here’s the situation that makes this interesting: ServiceNow just posted a truly strong quarter, while the stock barely reacted. Subscription revenue grew 24.5% year-over-year to $3.8 billion in Q2 2026, beating expectations by 150 basis points, and remaining performance obligations (revenue that’s already contracted but not yet booked as sales) grew 21% to $29 billion (ServiceNow Q2 2026 earnings release). Despite that, the stock is down about 16% YTD, and Bank of America raised its price target to $150 from $130 right after the release (Yahoo Finance). Ultimately, the gap here between the fundamentals of the business and the stock price is basically the whole thesis.
And you’re not overpaying to get in, either. Based on next year’s expected earnings, the stock isn’t trading at some crazy multiple, especially for a company still growing subscription revenue north of 20%. The AI story here is also different from the infrastructure names we already hold, as ServiceNow isn’t trying to build the best model; rather, it’s trying to be the layer companies use to govern AI once it’s deployed. This structure is showing up in the numbers, with ServiceNow’s AI products crossing $1 billion in annual contract value and agentic deployments up ninefold in just nine months.
Potential Risks
ServiceNow faces real competition from Microsoft, Salesforce, and Atlassian, and there’s uncertainty about whether AI will deepen companies’ reliance on ServiceNow or eventually enable them to automate around it. Margins are also worth keeping an eye on, as non-GAAP subscription gross margin dipped to 80.5% from 83% a year ago amid rising AI infrastructure costs, and the company recently announced roughly 300 layoffs as it shifts headcount toward AI-focused roles (Simply Wall St). But with revenue and remaining performance obligations growing confidently, and the layoffs framed as a shift toward AI talent rather than a cost-cutting measure, the margin pressure seems more like a company investing on purpose, not one losing its grip.
Why-to-Buy
We’re getting a company that just beat targets across the board and still got sold off, which is exactly the kind of setup CFR looks for: a market that hasn’t yet given the business credit for how well it’s actually performing. ServiceNow also fills a real hole in our portfolio, as we already have the chip and power side of AI covered, and NOW adds the software side. With strong retention, a growing AI product line, and a stock that still has room to catch up to the growth, ServiceNow is CFR’s Pick of the Week!
