ServiceNow’s AI Surge Hits $1.5 Billion, Yet Investors Punish the Stock for What’s Missing

ServiceNow delivered a quarter that checked most boxes — revenue beat, AI bookings soaring, and guidance raised — yet the market responded with the worst single-day selloff in the company’s history. Shares tumbled roughly 18% on Thursday, settling near $85, as investors zeroed in on two cracks in the narrative: a geopolitical drag on near-term growth and margin pressure from a major acquisition.

The Numbers That Met Expectations — And the One That Didn’t

First-quarter revenue came in at $3.77 billion, edging past the consensus estimate of $3.75 billion and representing 22% year-over-year growth. Subscription revenue matched that pace, reaching $3.67 billion. Non-GAAP operating margin landed at 32%, 50 basis points above the company’s own guidance.

But the metric that rattled the Street was current remaining performance obligations (cRPO), which rose 22.5% to $12.64 billion — a whisker shy of analyst expectations. The culprit? Delayed closures of several large on-premise government contracts in the Middle East, where the ongoing regional conflict has thrown a wrench into procurement timelines. CFO Gina Mastantuono confirmed the geopolitical headwind trimmed subscription growth by 75 basis points. CEO Bill McDermott expressed confidence that most of those deals would close later this year, but the market wasn’t in a forgiving mood.

AI Momentum Accelerates, But Monetization Takes Time

The bright spot — and it’s a significant one — is the explosive growth of Now Assist, ServiceNow’s generative AI product suite. Management raised its full-year 2026 AI-specific ACV target to $1.5 billion, a 50% increase from the previous $1 billion goal. The underlying metrics are striking: customers spending more than $1 million annually on Now Assist surged over 130% year-over-year, while deals involving three or more Now Assist products jumped nearly 70% in the first quarter.

The company also signed 16 deals with net-new ACV exceeding $5 million each in the quarter, an 80% increase from a year earlier. Half of net-new business now flows through consumption-based pricing models like tokens and connectors — a structural shift management frames as an incremental growth lever rather than a threat to recurring revenue.

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

Yet the subscription-based nature of ServiceNow’s revenue model means that AI-driven acceleration takes time to show up in reported results. Stifel analysts noted that the full-year guidance remains heavily back-end loaded, with much of the expected pickup concentrated in the fourth quarter.

The Armis Hangover and Margin Math

The second source of investor unease stems from the $7.75 billion acquisition of cybersecurity firm Armis, which closed on April 20. The deal is already baked into the revised 2026 subscription revenue guidance of $15.735 billion to $15.775 billion — up from a prior midpoint of roughly $15.55 billion. But that guidance includes about 125 basis points of contribution from Armis. Strip out the acquisition, and the organic revenue outlook didn’t budge despite a strong quarter.

Margins are taking a hit too. ServiceNow now projects full-year non-GAAP subscription gross margin of 81.5%, below the 82.1% the market had penciled in. The company also trimmed its full-year non-GAAP operating margin forecast to 31.5% and free-cash-flow margin to 35%, with the Armis integration weighing on FCF by roughly 2 percentage points.

Wall Street Reacts With a Flurry of Target Cuts

The post-earnings drubbing triggered a wave of price target revisions. Goldman Sachs lowered its target from $188 to $163 while maintaining a buy rating. Jefferies cut more aggressively, from $175 to $135, though it kept a positive stance. KeyBanc struck a more bearish tone, reiterating an underweight rating with a $85 target, citing the cRPO miss and margin risks.

With the stock now roughly 52% below its 52-week high and down more than 30% year-to-date, the pressure is on management to reset the narrative. All eyes turn to the company’s Financial Analyst Day on May 4, where McDermott and his team are expected to lay out a more detailed roadmap for AI monetization and address the lingering questions about how consumption-based pricing will reshape the margin structure over the long haul.