ServiceNow stock plunges ahead of earnings: how AI will affect the company

ServiceNow Inc. NOW shares fell 5% on Wednesday as the company is set to report second-quarter earnings on Wednesday after the close.

Investors are closely watching whether the enterprise software company can reassure markets about its artificial intelligence strategy amid growing concerns about the sector's long-term outlook.

The earnings report comes during a challenging period for software stocks, as investors assess whether AI-powered tools and autonomous agents could reduce demand for traditional enterprise software products.

ServiceNow shares have fallen sharply over the past year, making the company one of the most closely watched names in the software sector ahead of earnings.

Analysts expect ServiceNow to report adjusted earnings per share of $0.86, up from $0.82 a year earlier, while revenue is projected to increase 22% year over year to approximately $3.93 billion, according to Koyfin data.

Earnings expectations center on revenue growth and backlog

While revenue growth is expected to remain strong, investors will be paying particular attention to ServiceNow's contract backlog that is expected to convert into revenue over the next 12 months.

The company's second-quarter guidance disappointed investors three months ago, contributing to concerns that AI could undermine traditional software business models. The stock fell 18% following that outlook.

Subscription renewal rates will also be closely monitored after they were last reported at 97%.

Profit growth is expected to be affected by ServiceNow's $7.8 billion acquisition of cybersecurity company Armis, completed in April.

The company previously warned that the acquisition would weigh on second-quarter operating margins.

Results are also expected to reflect additional interest expense from a short-term $4 billion loan used to finance the transaction. The loan matures in October, with an option to extend it for another six months.

Morgan Stanley recently initiated coverage of ServiceNow with an Overweight rating and a $180 price target.

The investment bank said ServiceNow ranks among only five companies in its coverage universe that place within the top 15 for both competitive moat and execution journey, while highlighting the company's durable competitive advantages.

AI strategy remains under investor scrutiny

Artificial intelligence has become one of the biggest questions surrounding ServiceNow's long-term business model.

The company has historically generated revenue through user-based subscriptions, but investors have expressed concerns that AI agents could reduce the need for employees handling IT service management, ticketing and incident management tasks.

Fewer users could translate into fewer software subscriptions, creating pressure on future revenue growth.

ServiceNow has responded by repositioning itself around enterprise AI.

“ServiceNow delivers solutions that help public and private organizations govern, secure and manage artificial intelligence", the company said in its annual report in January.

The company has introduced its own AI agents and reorganized its product portfolio around an AI-first platform designed to orchestrate enterprise AI models and workflows.

It has also begun transitioning toward a hybrid pricing structure that combines traditional user subscriptions with AI consumption-based revenue.

Cybersecurity expansion and analyst optimism

Alongside its AI strategy, ServiceNow has expanded its cybersecurity business through the acquisition of Armis.

The company has also raised its 2026 AI revenue target to $1.5 billion and reaffirmed its goal of exceeding $30 billion in annual subscription revenue by 2030 as AI products become a larger contributor to its business.

Recent partnerships with Wipro and Accenture are intended to help enterprise customers deploy agentic AI across information technology, human resources, procurement and security operations.

Despite the stock's decline, analyst sentiment remains broadly positive.

According to Koyfin data, 44 of 49 analysts currently rate ServiceNow as Buy or higher, with an average price target of $140.14, implying roughly 37% upside from Tuesday's closing price.

Wednesday's earnings report is expected to provide investors with fresh insight into whether ServiceNow's AI transformation can offset growing competitive pressures across the enterprise software industry.