Hedge Funds Are Buying ServiceNow’s 18% Plunge — Here’s What They See That Others Miss

ServiceNow beat Q1 guidance but fell 18% on Middle East deal delays and Armis acquisition costs. AI revenue target raised 50% to $1.5B, attracting hedge fund buying.

The math looks brutal on the surface. ServiceNow delivered a quarter that beat its own guidance on every major metric, lifted its AI revenue target by 50%, and still watched its stock get cut down by nearly 18% on April 23. That single-day rout wiped out more than half the gains the shares had managed over the prior twelve months. Yet rather than flee, a growing number of institutional investors are wading in.

Polen Capital, a growth-focused asset manager, used the first quarter of 2026 to build its ServiceNow position, selling out of Adobe, Intuit and Paycom to free up capital. The firm’s investor letter laid out the thesis plainly: AI agents will depend on mission-critical enterprise software, and companies like ServiceNow are positioned to monetize those digital workers just as they do human ones. The broader hedge fund community appears to agree. The number of hedge fund portfolios holding ServiceNow stock rose to 118 by the end of the fourth quarter of 2025, up from 104 three months earlier, placing the company 25th among the most popular hedge fund holdings.

The Quarter That Wasn’t Enough

Subscription revenue climbed 22% year over year to $3.67 billion in the first quarter of 2026. Remaining performance obligations — a key forward-looking metric — hit $27.7 billion, also up 25%. Adjusted earnings per share edged past consensus estimates. For the full year, management raised its subscription revenue forecast to a range of $15.74 billion to $15.78 billion, implying roughly 22% growth.

So what spooked the market? Two headwinds, neither of them related to product weakness. Several large on-premise deals in the Middle East were delayed due to the ongoing regional conflict, shaving about 75 basis points off subscription growth in the quarter. Company officials have indicated that multiple contracts have already closed in the second quarter. The second drag is the Armis acquisition, a $7.75 billion deal for the cybersecurity startup that closed earlier than expected on April 20. CFO Gina Mastantuono warned of 75 basis points of pressure on operating margins and roughly 200 basis points of free cash flow drag in 2026, with normalization not expected until 2027.

AI Revenue Target Gets a $500 Million Bump

The headline number that should have dominated the conversation is the revised AI revenue target. CEO Bill McDermott raised the internal goal for 2026 from $1 billion to at least $1.5 billion, counting only the incremental AI contribution — not total product revenue. The Now Assist product suite is the engine behind that upgrade. Deals involving three or more Now Assist products grew nearly 70% year over year, and 36 customers signed on for five or more modules. The number of clients spending $1 million or more annually on Now Assist surged more than 130% versus the prior year.

The business model itself is shifting beneath the surface. Half of net new business now comes from non-seat-based models — token consumption, infrastructure usage and other consumption-driven mechanisms. That marks a structural break from the traditional license-and-seat paradigm that has defined enterprise software for decades.

Wall Street Trims Targets But Stays Bullish

The analyst community has responded with a mix of lowered price targets and maintained positive ratings. JPMorgan cut its target from $195 to $145 while keeping an Overweight rating. Cantor Fitzgerald holds Overweight with a $122 target. Argus rates the stock a Buy at $134. BMO Capital reduced its target to $115 from $120 but maintained Outperform. Among 54 analysts covering the stock, the median price target sits at $140 — implying roughly 55% upside from current levels. Forty-three analysts recommend buying.

Short interest climbed about 30% in April to roughly 39 million shares, raising the stakes for the next round of data points. The Q2 results will test whether the $1.5 billion AI target is a credible trajectory or an ambitious stretch. The next concrete milestone comes on May 4, when management holds the Financial Analyst Day and is expected to provide detailed guidance on AI adoption trends and the new pricing model.

The Google Cloud Partnership and Real-World Results

Alongside the Armis deal, ServiceNow deepened its collaboration with Google Cloud. On April 22, the two companies announced new AI solutions targeting telecommunications, retail and IT service management. One early customer case study came from TridentCare, which automated 96% of its appointment scheduling across 127 markets and cut patient wait times by 57%.

The Armis acquisition, meanwhile, adds a cybersecurity layer that management believes will become increasingly integrated with the core workflow platform. The near-term margin pain is real, but the strategic logic is clear: combine enterprise workflow automation with security posture management at a moment when both are being reshaped by AI. Whether the market gives ServiceNow time to prove that thesis is the open question.