Concerns over AI disrupting the software industry intensify! ServiceNow (NOW.US) shares plunge over 24%; major Wall Street banks come to its defense: business growth momentum remains strong.

On Thursday, shares of enterprise software giant ServiceNow (NOW.US) plunged more than 24%, mainly because some of the company's key fourth-quarter business metric guidance fell short of market expectations, once again triggering investor concerns that artificial intelligence (AI) could disrupt the traditional software industry. However, analysts at Bank of America Corp and JPMorgan both remained optimistic about the company's long-term prospects, believing that its AI business growth momentum remains strong and that short-term performance fluctuations have not changed the fundamentals. ServiceNow's Q3 revenue beat expectations, but earnings slightly missed market estimates The financial report showed that in the third quarter ended September 30, ServiceNow's revenue rose 20.5% year over year to US$4.11 billion, above analysts' expectation of US$4.09 billion. Adjusted earnings per share were US$1, slightly below the market expectation of US$1.02. As an important indicator of future revenue growth, the company's current remaining performance obligations (cRPO) reached US$13.65 billion, up 20% year over year, above the market expectation of US$13.57 billion. At constant currency, cRPO rose 21% year over year, exceeding Wall Street's expectation of 19.7%. At the same time, ServiceNow's third-quarter operating margin was strong, 130 basis points higher than the market expectation of 32.5%. Although overall third-quarter results were solid, the company's outlook for some key fourth-quarter growth indicators disappointed investors. ServiceNow expects fourth-quarter subscription revenue to be between US$4.25 billion and US$4.26 billion, above the market expectation of US$4.24 billion; full-year subscription revenue is expected to be US$15.78 billion to US$15.79 billion, also exceeding the market expectation of US$15.76 billion. However, the growth rate guidance for fourth-quarter cRPO and subscription revenue was 120 basis points and 40 basis points below market expectations, respectively, which became the main reason for the sharp drop in the share price. Bank of America Corp: Strong AI business growth, but short-term guidance still in question Bank of America Corp analyst Tal Liani maintained a "Buy" rating on ServiceNow with a price target of US$180. Liani noted that ServiceNow's third-quarter results were overall solid, with cRPO growth and operating margin both better than market expectations, but fourth-quarter growth guidance fell short of expectations, weakening investor confidence. He particularly emphasized that the company's AI business still shows strong growth momentum. In the third quarter, net new annual contract value (nnACV) from ServiceNow's AI business rose 65% year over year, prompting management to raise its full-year 2026 AI business annual contract value (ACV) forecast. However, Liani said that although management attributed part of the weak fourth-quarter guidance to accounting treatment and timing differences in revenue recognition, he did not fully agree with this explanation. Nevertheless, he remains bullish on ServiceNow's long-term prospects, believing that there is clear evidence of AI business growth and that current fluctuations in some metrics more reflect short-term challenges in the company's business expansion process. JPMorgan raises price target to US$160, bullish on long-term potential of AI business JPMorgan analyst Samik Chatterjee maintained an "Overweight" rating on ServiceNow and raised the price target from US$150 to US$160. Chatterjee believes that ServiceNow's latest financial report and business outlook were somewhat complex and failed to fully convince investors that the company's growth momentum can continue. However, he pointed out that part of the slowdown in fourth-quarter cRPO growth was due to a change in the statistical scope of the relevant metric, and that the correlation between cRPO and subscription revenue growth may no longer be as close in the future as in the past. From the perspective of actual business performance, ServiceNow still showed a number of positive signals. First, third-quarter cRPO at constant currency rose 21% year over year, above the company's previous guidance of about 20%. Of the upside, about half came from actual business performance beating expectations, while the other half was driven by customers renewing early. Second, AI business growth continued to accelerate. ServiceNow raised its end-2026 AI business ACV target by US$200 million, from US$1.5 billion to US$1.7 billion. In addition, the number of large customers continued to increase. The number of customers with annual contract value exceeding US$5 million reached 680, up from 658 in the second quarter and 553 in the same period last year. The average annual contract value of these large customers also rose further to US$15.4 million from US$14.6 million in the third quarter last year and US$15.2 million in the second quarter this year. Chatterjee pointed out that ServiceNow is currently using professional services to help customers deploy high-value AI use cases. This strategy temporarily shifts some revenue from subscription revenue to professional services revenue. Although it will not change the company's total revenue, it may affect the performance of subscription revenue and cRPO metrics in the short term. He believes that as customers gradually expand their use of AI products with the support of professional services, related investments are expected to stronger subscription revenue growth in the future. Although the company expects fourth-quarter cRPO growth to slow and to face additional pressure in fiscal 2027, JPMorgan believes that ServiceNow's implied fourth-quarter revenue growth year over year remains at a level of just over 20%, and the preliminary forecast of about 19% growth for fiscal 2027 also indicates that its underlying business remains solid. It is worth noting that this 2027 growth estimate has not yet fully incorporated the additional contribution that could come from an acceleration in AI adoption. Overall, ServiceNow's latest financial report reflects an important contradiction currently facing the software industry: although AI products are creating new revenue growth opportunities, the revenue structure, contract metrics, and growth models of traditional software companies are also changing. For investors, short-term growth guidance falling short of expectations has triggered concerns about AI disrupting software business models; while some Wall Street analysts believe that ServiceNow's continued growth in AI contract value and large-customer spending indicate that the company is still expected to benefit from the broader adoption of enterprise AI applications.