ServiceNow’s AI Ambitions Hit $1.5 Billion as the Stock Gets Hammered Anyway

ServiceNow beats Q1 estimates with 22% subscription growth and raises AI revenue target to $1.5B, but cRPO deceleration and Armis integration costs send stock down 13% in after-hours trading.

ServiceNow just delivered a quarter that most software companies would kill for — 22% subscription growth, a raised full-year outlook, and an AI revenue target bumped to $1.5 billion. The market’s response? A 13% after-hours drubbing that pushed the stock toward its 52-week low near $90.

The disconnect between operational strength and investor sentiment has rarely been wider. Since January, shares have shed roughly 45% of their value, landing at a forward price-to-earnings multiple of about 20 — historically cheap for a company growing at 20% annually. But cheap alone isn’t enough to stop the selling.

The Numbers That Beat — and the One That Didn’t

First-quarter subscription revenue came in at $3.67 billion, up 22% and ahead of the $3.74 billion consensus estimate. Total revenue reached $3.77 billion. Adjusted earnings per share of $0.97 edged past the $0.96 forecast. On the surface, it’s a clean beat.

The trouble lay in the current remaining performance obligations, or cRPO. That forward-looking metric rose 21% to $12.45 billion — solid growth, but a slight deceleration from the prior quarter. For a market demanding accelerating momentum in the AI transition, any hint of a slowdown triggers a sell-first-ask-questions-later response.

Geopolitical friction in the Middle East added to the drag, delaying contract closures and shaving roughly 75 basis points off revenue growth. CEO Bill McDermott said discussions with affected customers remain ongoing, but the uncertainty weighed on near-term visibility.

AI: The Engine That’s Reshaping the Business Model

The headline number that grabbed attention was the raised AI revenue target: at least $1.5 billion for 2026. That’s up from previous guidance and reflects a business that’s rapidly shifting away from traditional licensing. Half of all new business signed in the first quarter came through consumption-based pricing models rather than per-seat arrangements — a structural shift that aligns ServiceNow’s revenue with actual usage rather than headcount.

Customer appetite for AI solutions is accelerating. The number of clients spending more than $1 million annually on AI products jumped 130% year over year. The company is also deepening its partnership with Google Cloud, combining Google’s Gemini models with ServiceNow’s platform to build autonomous AI agents for industries including 5G telecom and retail. Logistics provider TridentCare is already using the integrated capabilities.

The Armis Hangover

The $7.75 billion acquisition of cybersecurity firm Armis closed during the quarter, and its integration costs are showing up in the margin numbers. GAAP gross margin slipped to 75% from a year earlier, while the company guided for a 25-basis-point drag on gross margin and a 200-basis-point hit to free cash flow margin from the deal.

Management’s full-year outlook now calls for subscription revenue between $15.735 billion and $15.775 billion, representing 22% to 22.5% growth. For the second quarter, they’re targeting subscription growth of 22.5%.

Wall Street’s Mixed Signals

Despite the post-earnings selloff, analysts remain broadly bullish. Of the 46 analysts covering the stock, 37 rate it a strong buy. But the price targets are coming down to reflect the new reality. DA Davidson cut its target to $190, while Citi lowered its fair value estimate to $154 — both maintaining buy ratings.

Short sellers, meanwhile, have been piling in. Short interest has climbed to roughly 39 million shares, a 30% increase, signaling that skepticism is far from vanquished.

For long-term believers, the math is compelling: a 20x forward P/E on a business growing subscription revenue at 22% with an expanding AI pipeline. But in a market that wants proof — not promises — the next test comes this summer, when second-quarter results will show whether the momentum can hold.