ServiceNow’s AI Revenue Engine Hits $750M — But Margin Pressure Looms Ahead of July 29 Verdict

The narrative around ServiceNow has become a study in contrasts. On one side, the AI product line Now Assist is firing on all cylinders, generating an annual contract value of $750 million in the first quarter of 2026 — a figure that prompted management to more than double its full-year target from $1 billion to $1.5 billion. On the other, the company is absorbing the costs of three simultaneous acquisitions, and the subscription gross margin has already slipped from 84.5% to 81.5% year-over-year.

That tension came into sharp focus on Friday, when the stock surged roughly 10% to close at €86.88 in Frankfurt, or $97.42 in New York. The immediate catalyst was a report that OpenAI may push its initial public offering to 2027, blunting fears that deep-pocketed AI startups would quickly disrupt established SaaS players. But beneath the relief rally lies a more nuanced debate about whether ServiceNow’s fundamental strength can outweigh the drag from integration costs and geopolitical headwinds.

Subscription Growth Remains the Bull Case Anchor

ServiceNow’s core subscription revenue has been a steady compounder. Revenue surged from $5.9 billion in 2021 to $13.3 billion in 2025, and analysts project $16.2 billion for 2026 and $19.2 billion for 2027. The first quarter didn’t break that trajectory: remaining performance obligations reached $12.64 billion, up 22.5% year-over-year, while new business deals exceeding $5 million jumped nearly 80%.

The company’s AI monetization is gaining breadth, not just depth. Deals involving three or more Now Assist products rose almost 70% year-over-year, and the number of customers spending at least $1 million on the AI suite grew more than 130%. Renewal rates have held at 97% for six consecutive quarters — hardly a sign of weakening demand.

None of this was lost on the C-suite. CEO Bill McDermott personally bought $3 million worth of shares in late February, and several other executives scrapped planned stock sales. Such insider signals are closely watched on the Street.

The Bear Case: Margins Under Siege

The counterargument is not a straw man. ServiceNow closed its $7.75 billion acquisition of security firm Armis in April, and the financial drag is precisely quantified: Armis is expected to shave 25 basis points off subscription gross margins, 75 basis points off operating margins, and a full 200 basis points off free-cash-flow margins for fiscal 2026. The impact is front-loaded — for the second quarter alone, the operating margin headwind is 125 basis points.

Should investors sell immediately? Or is it worth buying ServiceNow?

At the same time, ServiceNow is integrating Armis alongside Moveworks and Veza, stretching management bandwidth. Delayed government contracts in the Middle East added another 75 basis points of headwind to first-quarter subscription revenue growth. COO Amit Zavery told Reuters those deals should close over the course of the year, but timing remains uncertain.

The structural question is whether pricing pressure from AI-native competitors will keep eroding margins. The Columbia Global Technology Growth Fund has flagged risks to ServiceNow’s traditional licensing model. If the subscription gross margin compression deepens beyond what management explains as scaling AI infrastructure costs, the valuation math changes materially.

Valuation Hits Historic Lows — But Technicals Are Neutral

After the April sell-off that took the stock to a 52-week low, the forward EV/EBITDA multiple has compressed to roughly 14 times — the cheapest in ServiceNow’s entire public history. The average analyst price target stands at €124.27, implying upside of 43.8% from Friday’s close. Benchmark recently lifted its target to $130 and maintained a buy rating. Of the 34 analysts covering the stock, all rate it a buy.

Yet the Relative Strength Index sits at about 49, squarely in neutral territory. The annualized volatility of roughly 80% underscores how quickly sentiment can flip. A CIO survey showing 47% of IT decision-makers plan to increase spending on ServiceNow provides a tailwind for the bull case, but that confidence has yet to translate into sustained share-price momentum.

All Eyes on July 29

The macro backdrop offers some relief: falling long-term yields, partly driven by a potential reopening of the Strait of Hormuz, have boosted high-multiple software names. But the real test comes after the close on July 29, when ServiceNow reports second-quarter results. The key metric will be subscription revenue growth — management has guided for roughly 21% on a constant-currency basis. A miss toward the mid-teens would give bears their first hard fundamental evidence that AI spending is crowding out traditional software budgets.

Equally important is the operating margin. With Armis already set to subtract 125 basis points in Q2, any further deterioration would fuel concerns that the integration costs are more persistent than expected. If the subscription growth holds near 21% and the margin drag stays within guided ranges, the recent sell-off will look like a valuation reset — not a business problem. If not, the bears finally have a narrative that lives up to the price action.