The Claude Portfolio X account runs a simulated portfolio managed by AI. ServiceNow (NYSE:NOW) has been at the top of that portfolio for months, at 12% of holdings, even as the stock kept sliding on fears that AI agents would make workflow software obsolete. The account never sold. Its reasoning: deployment and trust matter more than raw tech features, and big companies switch platforms slowly no matter how fast AI moves. Now ServiceNow’s Q2 report backs that call up with real numbers.
The Claude Portfolio account on X is backed by Autopilot and AI Finance Labs. It is set up to test whether Claude can outperform the market alongside similar portfolios run by Grok and ChatGPT.
The Bull Case Gets Confirmed?
ServiceNow reported Q2 on Wednesday. Subscription revenue rose 23% in constant currency. Total revenue grew 25% year over year. EPS beat analyst estimates. Current RPO climbed 21%.
The stock dropped 6.5% in regular trading the day before earnings, then jumped 7% in premarket once the numbers hit. That reaction alone says the market had gotten too bearish.
What Was The Street Worried About?
The fear was that AI agents would make workflow software like ServiceNow obsolete. The idea: once companies deploy AI agents that can handle tasks directly, they won’t need a middleman platform to route and manage that work. Bears figured ServiceNow’s core product, coordinating tickets, approvals, and processes between departments, would get skipped over as AI agents just do the work themselves.
Bears Wrong?
The AI disruption fear from the earlier piece hasn’t materialized either. AI Annual Contract Value crossed $1 billion in Q2, growing over 40% quarter over quarter. Management raised its 2026 subscription revenue guidance to $15.770 billion at the midpoint. CEO William McDermott called out a coming business model shift toward AI-native products, including a conversational service desk with no tickets.
Customer counts back this up too. Customers spending $5 million or more in annual contract value grew from 533 a year ago to 658 in Q2. Average ACV among these large customers rose to $15.2 million from $14.4 million. That shows the company is winning bigger deals at higher prices.
Photo by AlphaTradeZone
Why the Gross Margin Drop Looks Scarier Than It Is
GAAP subscription gross margin fell to 73.5% in Q2 from 80% a year ago. Bears jumped on this number fast. But most of that drop traces back to acquisition accounting, not AI costs eating the business alive.
Management guided to 81% subscription gross margin going forward, which suggests the AI cost pressure stabilizes rather than compounds.
The Bear Case Still Has Teeth
Even with a strong quarter, a few things keep this from being a clean win.
The guidance raise was thin relative to the beat. Management raised the 2026 subscription revenue midpoint by just $15 million. Management admitted roughly half of the Q2 outperformance came from federal deals pulling forward from Q3 to Q2. That’s a timing shift, not new demand. If Q3 comes in soft because of that pull-forward, the “beat and raise” story looks less convincing.
Valuation already priced in a lot of good news. NOW trades at a forward P/E of 23x, down from a five-year average of 60x. That’s real compression, and bulls read it as room to run. But it still sits above Salesforce at 11x and Workday at 12x on a non-GAAP basis. If subscription growth decelerates even slightly, that premium multiple has further to fall, not less.
Big tech competition is real, not theoretical. Microsoft wants to own the entire workflow layer for its customers, not just plug into ServiceNow’s platform. If large enterprises standardize on Microsoft’s own agent orchestration instead of routing through ServiceNow, the integration moat argument weakens. ServiceNow’s partnerships with IBM, Cognizant, and HPE help, but they don’t remove this risk.
The stock is still down sharply over the past year. NOW has lost more than half its market value over the trailing 12 months. One strong quarter doesn’t undo that kind of drawdown, and investors burned by the slide may need several more clean quarters before trust returns.
While we acknowledge the risk and potential of NOW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NOW and that has 10,000% upside potential, check out our report about the cheapest AI stock.
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