DVB
Deep-Value Investor, Ex-Tech Executive, Agentic Equity Research Builder
ServiceNow's slowing contracted-revenue growth suggests agentic AI and growing open-source alternatives may be reducing the need for its products. Q3 operating margin fell to 9.4% from 16.8% a year earlier, net income dropped, and cRPO growth slowed from 25% to 20.5%; Q4 guidance implies 18.5%. x.comÂ
ServiceNow's seat business is being cannibalized faster than AI deals can replace it. Next-quarter cRPO growth is guided to 18.5%, down from 20.5%, while subscription growth was 24.5% two quarters ago; agentic usage on its platform is up 13x. Management points to AI deal value heading to $1.7bn, against a roughly $16bn subscription business. The slowdown leaves more pain ahead. Underweight, $90 target. x.com x.comÂ
ServiceNow's gross profit and expense trends show its underlying business deteriorating despite the AI revenue pitch. Quarterly gross profit grew just over 10% year over year, possibly its slowest pace ever, while expenses rose across the board and profit weakened materially. Relabeling revenue as AI has not changed the trend in total sales. x.comÂ
ServiceNow's AI contract growth and improving free cash flow margin make the 18% selloff excessive and its shares a massive discount among leading enterprise AI companies. AI net-new ACV rose 65%; its 2026 AI ACV target rose to $1.7B, up 70% from the start of the year. Adjusted operating margin slipped to 32.5% from 33.5%, but free cash flow margin rose to 20% from 17.5%. Acquisition costs, stock compensation and severance largely drove the GAAP decline. x.com x.com x.comÂ
ServiceNow's costs are rising far faster than revenue without the RPO acceleration management promised. Q3 revenue rose 21%, while total cost of revenue climbed 56% and net income fell 45%; stock compensation appears to be using about half of free cash flow. The selloff looks deserved, though the shares are now closer to fair value. Sustainable margins and measurable returns remain the test. x.com x.com x.com x.com x.com x.comÂ
ServiceNow's guidance growth is set to fall by another fifth next quarter, a poor trajectory rather than a buying opportunity after earnings. x.comÂ
ServiceNow's third-quarter subscription revenue, cRPO and operating-margin beats make its double-digit selloff look overdone. After a 77% rise from April lows, it needed a big beat and raise; lower fourth-quarter cRPO guidance and back-loaded implications for $30-$32 billion in subscription growth by 2030 leave the stock in show-me mode. x.comÂ
ServiceNow's growth and deteriorating margins do not justify its valuation. It grew 3% quarter over quarter against a 107x trailing GAAP P/E, and its margins continue to deteriorate. It remains a great company, but is mostly saturated relative to that valuation. x.com x.com x.comÂ
ServiceNow's 66% stock decline is a warning, not a value opportunity, because the market is discounting AI collapsing the cost of the software it sells. Its revenue grew from $0.2 billion to $4.0 billion a quarter since 2015, a 28.8% compound rate across 44 straight rising quarters, and operations are flawless. But a flawless past is no promise about the future, and when fundamentals and the chart disagree this violently, the chart has the better track record. x.comÂ
ServiceNow's unexpected expense surge makes its rich valuation more vulnerable in a struggling software sector. Revenue rose 21%, but spending drove an EPS miss and one quarter of guided cRPO deceleration; wider market conditions could hurt near term. The 20% selloff looks excessive, and few software companies should benefit as much from AI. Management could deliver over 3-5 years, though the stock is only close to a buy again now; below $100 looks good for the long term. x.com x.com x.com x.comÂ
Investors dislike ServiceNow scaling up forward-deployed engineers, even though it is directionally right for customer outcomes. That aversion is the main reason the SaaS selloff is back. x.comÂ
