ServiceNow Posts Blowout AI Numbers, Then Gets Punched in the Mouth by Wall Street

The math doesn’t add up — unless you look beneath the hood. ServiceNow delivered a first-quarter earnings report that beat consensus estimates on both revenue and earnings, yet the stock cratered 17.7% in a single session, its steepest one-day drop on record. By Friday’s close, shares had partially recovered to around $89, but the damage was done: the stock has now shed roughly 44.6% over the past year, a far cry from its 52-week high of $211.48.

The headline numbers were fine — better than fine

Subscription revenue hit $3.67 billion in the first quarter, up 22% year over year. Total revenue came in at $3.77 billion, with GAAP earnings per share of $0.97 — both marginally ahead of analyst forecasts. Remaining performance obligations, a key forward-looking metric, rose to $12.64 billion, also up roughly 22%. On a non-GAAP basis, operating margins improved slightly to 32%.

But the GAAP gross margin told a different story, sliding from 79% to 75% as integration costs from the Armis acquisition weighed on profitability.

The AI engine is firing on all cylinders

ServiceNow’s generative AI product, Now Assist, is the standout story. Customers with an annual contract value exceeding $1 million surged more than 130% year over year. CEO Bill McDermott said the AI growth is “far exceeding even our own expectations.” The company now expects Now Assist to surpass $1 billion in annual contract value during 2026, with the potential to reach $1.5 billion.

A newly expanded AI partnership with Google Cloud, focused on autonomous enterprise processes, adds further momentum to the narrative.

Two acquisitions, one margin headache

The company closed two deals in quick succession: cybersecurity startup Veza in March and asset intelligence provider Armis on April 20, just days before the earnings release. Both are designed to bolster ServiceNow’s security platform, but the near-term cost is real. Management guided for a roughly 75-basis-point drag on operating margins and about 200 basis points on free cash flow margins for the full year 2026. Normalization isn’t expected until 2027.

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

The Middle East factor that nobody saw coming

The real catalyst for the selloff was geopolitical. Multiple large on-premise deals in the Middle East were delayed due to the ongoing regional conflict, costing the company roughly 75 basis points of subscription revenue growth in the first quarter. CFO Gina Mastantuono acknowledged to CNBC that she had built “a bit more caution” into the full-year guidance because of the situation and its potential to disrupt deal closures.

That caution, layered on top of acquisition-related uncertainty, spooked investors. The stock closed at $84.78 on Thursday, down from $103.07 the prior day, before recovering to around $89 on Friday.

Analysts scramble — mostly to lower targets

The analyst reaction was swift and nearly unanimous in direction, if not in magnitude. BMO Capital cut its price target from $120 to $115 (outperform), while Citi slashed from $177 to $154 (buy). DA Davidson went from $220 to $190 (buy), and Piper Sandler from $200 to $140 (buy). The most bearish call came from KeyBanc’s Jackson Ader, who lowered his target from $115 to $85 with a sell rating, citing the Middle East delays, weak cRPO growth, and margin compression — the only target in the consensus that sits near the current share price.

Despite the cuts, the broader analyst community remains constructive: 39 buy ratings, 4 holds, and 3 sells. The majority still believe in the story — but they’re waiting for proof.

What Q2 must deliver

For the second quarter, ServiceNow guided subscription revenue between $3.815 billion and $3.820 billion, representing growth of roughly 22.5%. The company expects cRPO growth to come in at 19%. The critical question hanging over the stock is whether that cRPO growth is organic or juiced by acquisition accounting. Until that’s clarified, the market appears willing to punish the stock for uncertainty it can see rather than reward it for AI growth it can’t yet fully trust.

The next test comes in July with second-quarter results. By then, the market will have a clearer picture of whether the Middle East headwinds are fading, whether Armis and Veza are integrating smoothly, and whether Now Assist can indeed hit that $1.5 billion milestone. Until then, ServiceNow’s stock is likely to remain in the penalty box — even if the underlying business is humming.