ServiceNow’s AI Alliance Triggers a 10% Rally, but the Subscription Growth Story Holds the Key to a Sustained Turnaround

The shares of ServiceNow surged more than 10% on Friday, closing at €86.88 in their biggest single-day advance in months, after the company announced an expanded partnership involving Google Cloud and HCLTech. Yet beneath the headline pop lies a deeper tug-of-war between a business that keeps churning out double-digit subscription growth and a market that has punished the stock to its cheapest ever valuation on an EBITDA basis. Whether the rally has legs depends on one number: the 21% constant-currency subscription growth the management has guided for in the second quarter.

The three-way alliance brings together ServiceNow’s workflow platform, Google Cloud’s Gemini large-language models, and HCLTech’s implementation muscle. The goal is to move generative AI agents from pilot projects into full production at large enterprises, with early use cases in manufacturing, field service and IT operations. A central piece is the so-called “AI Control Tower” — a governance framework designed to give companies transparency and control over their autonomous agents. Analysts responded quickly: Benchmark raised its price target to $130 and kept a buy rating, while Oppenheimer reiterated its outperform rating with the same target, also citing the earlier Cognizant partnership and the potential for an acceleration in growth during the second half of 2026. Friday’s move was amplified by the annual Russell index rebalancing, historically the highest-volume trading day of the year, which injected extra liquidity as index funds were forced to adjust their holdings.

For the bulls, the case rests on a business that has been delivering consistent, high-quality expansion. Revenue has roughly doubled from $5.9 billion in 2021 to $13.3 billion in 2025, and analysts see it climbing to $16.2 billion next year and $19.2 billion in 2027. Remaining performance obligations hit $12.64 billion in the first quarter, a 22.5% year-on-year increase, while deals worth more than $5 million in new business jumped nearly 80%. The monetisation of AI is accelerating: ServiceNow initially targeted $1 billion in AI-related revenue for 2026, but management raised that goal to $1.5 billion after the first quarter — a 50% increase. Deals involving three or more Now Assist products grew almost 70% year-on-year, suggesting customers are embedding AI deeply into multiple workflows rather than running isolated tests. The renewal rate has held at 97% for six consecutive quarters, a strong signal that underlying demand remains intact. Meanwhile the valuation has become extremely compressed: the NTM EV/EBITDA multiple sits at roughly 14 times, the lowest in the company’s history as a public entity. The average analyst price target stands at €124.27, implying upside of more than 40%, and 34 analysts carry a buy recommendation. A recent CIO survey found that 47% of IT decision-makers plan to increase their spending on ServiceNow.

Should investors sell immediately? Or is it worth buying ServiceNow?

The bears, however, have three concrete arguments that cannot be dismissed. First, the Armis acquisition is already weighing on margins. Management expects it to shave about 25 basis points off the subscription gross margin for the full year, 75 basis points off the operating margin, and 200 basis points from the free-cash-flow margin. In the second quarter alone, the operating margin headwind is estimated at 125 basis points. Second, ServiceNow is simultaneously integrating three companies — Moveworks, Armis and Veza — which ties up management bandwidth and raises questions about whether organic growth can absorb the drag. Government deals in the Middle East have also been delayed, though COO Amit Zavery told Reuters they should close later this year. Third, the structural pricing pressure from AI-native competitors is real. The Columbia Global Technology Growth Fund has explicitly flagged risks to ServiceNow’s traditional licensing model. The subscription gross margin dropped from 84.5% in the first quarter of 2025 to 81.5% a year later, a compression that management attributes to scaling AI infrastructure costs. If that trend deepens, the whole valuation equation shifts.

Technically, Friday’s jump does not yet signal a clean breakout. The stock is still down 1.12% over the past 30 days, and the relative-strength index sits at 49.1 — firmly neutral territory, neither oversold nor overbought. The annualised volatility of more than 80% underscores how choppy price action has been. A short-term catalyst may arrive on June 30, when, according to Raymond James, an expiring price guarantee on older contract models could prompt customers to lock in subscriptions at current terms, pulling forward revenue into the current quarter.

All of which sets the stage for July 29, when ServiceNow reports second-quarter results after the market close. The headline number to watch is subscription growth: if it lands near the guided 21%, the recent sell-off will look more like a valuation compression than a business problem. If it slips toward the mid-teens, the bear case gets its first hard fundamental data point. Equally important will be the operating margin: any compression beyond the 125 basis points already signalled from Armis would fuel fears that the margin erosion runs deeper than one acquisition can explain. For now, the stock is pricing in a lot of doubt — the partnership rally Friday may have been a reflex, but the real decision comes with the earnings print.

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