Morgan Stanley maintains ServiceNow (NOW.US) at "Overweight" but lowers its price target: AI business momentum is improving, but has yet to drive an acceleration in growth.

Morgan Stanley released an in-depth third-quarter research report on ServiceNow (NOW.US) on October 29, 2026. The core tension is that the company's AI commercialization data is impressive, but the AI dividend has yet to an acceleration in overall business growth. The institution maintains its "Overweight" rating but lowered its price target from $180 to $160; the company's closing price during the reporting period was $150.13, with a market capitalization of $156.586 billion. It judges that the stock price may trade in a range in the near term and that a return to acceleration in the core metric cRPO is needed to open up upside room for valuation. Looking at third-quarter operating data, the company's constant-currency cRPO grew 21% year over year, slightly exceeding company guidance, but the growth rate continues to decline; organic cRPO excluding acquisitions grew only 18% year over year, below 19% in the second quarter. Q4 guidance weakened further, with constant-currency cRPO growth guided at 18.5%, significantly below the market consensus of 20%. Part of the growth pressure comes from business fundamentals, and it is also disturbed by statistical rules and the company's strategic investments: contracts with termination-for-convenience (T4C) clauses are not included in cRPO but do recognize subscription revenue, which will create a 50bp drag on the metric in 2027; the company is increasing investment in field delivery engineers (FDE), with some revenue shifting from subscription business to professional services, which will create 50-100bp of growth pressure on subscription revenue from Q4 2026 to 2027. The AI business is the biggest highlight of the quarter, with management raising its AI annual contract value (ACV) target for the second time this year to $1.7 billion. In Q3, net new AI ACV rose 65% year over year, usage of agentic AI in production environments increased 13x year over year, and million-dollar-plus AI deals grew 4.5x. Multiple new product lines are growing rapidly, with six businesses already achieving ACV of more than $1 billion; internal application of AI has also created more than $1 billion in annualized benefits. On the profitability side, the company raised its fiscal 2026 free cash flow margin target to 36% and expects margins to continue expanding in 2027, but Q4 operating margin guidance was below market expectations, and non-GAAP EPS slightly missed expectations. In the report, Morgan Stanley constructed a multi-scenario valuation framework using DCF discounting at an 11.9% WACC: base-case price target of $160; bull case of $200 if new markets take off; bear case of $75 if new product expansion falls short of expectations. The focus of the bull-bear debate centers on the return on FDE investment: bulls believe delivery services can help customers realize business value faster, drive AI penetration, and drive a re-acceleration in cRPO and subscription revenue; while the bear risk is that customers currently impose clear ROI requirements on AI projects, which will lengthen sales cycles, and the input-output return of FDE investment is uncertain. Morgan Stanley lowered its 2027-2028 revenue and EPS forecasts, cutting its 2027 subscription revenue growth expectation from 19.8% to 18.0%. The institution is long-term positive on the company's competitive moat in the enterprise workflow track and its product matrix advantages, but explicitly states that before cRPO growth shows substantive improvement, the stock will be in a "valuation penalty period" and lacks clear upside catalysts. The report also flags downside risks such as intensifying competition and the seat-based pricing model being hit by generative AI, and recommends that investors continue to track three core variables: cRPO growth, the effect of AI transmission to revenue, and the realized returns on FDE projects.