ServiceNow, Inc. (NYSE:NOW) is winning more business as companies use AI to automate work, but growing its platform costs more. The stock trades at about 28 times forecast earnings. Can rising AI demand produce enough extra profit to justify that price?
Companies Need AI That Can Complete the Work
Businesses want AI that finishes tasks safely across their existing software and approval rules. ServiceNow, Inc. (NYSE:NOW)’s research found that only 16% of companies had integrated AI workflows across business functions, so that leaves a lot of room to grow.
ServiceNow already runs many of those processes; adding AI to existing workflows makes its platform more useful and gives customers reasons to buy more services. The importance of reliable data is explored in ServiceNow (NOW) Partners With Experian to Power Autonomous AI Agents With Trusted Data.
The opportunity is showing up in contracts since ServiceNow’s AI offerings passed $1 billion in annual contract value in Q2 2026. That figure measures the annual value of contracts, not revenue the company has already recognized. Subscription revenue rose 24.5% to $3.88 billion, which shows the wider platform keeps growing.
Contracted revenue expected over the next twelve months, known as cRPO, rose 21% to $13.2 billion. Management’s July outlook projected 19.5% growth for Q3, a slower pace than the latest revenue growth. Some federal subscription revenue also arrived early, which moved sales from Q3 into Q2.
Building the Platform Has a Financial Cost
Adjusted operating margin held at 29.5%, unchanged from a year earlier. That works out to roughly 30 cents of operating profit per dollar of revenue after excluding specified expenses. Reported operating margin fell to 4% from 11% because it includes costs that standard accounting requires.
ServiceNow, Inc. (NYSE:NOW) paid about $7.75 billion for Armis, using cash and debt. The deal added tools that identify and protect connected assets. Combined with workflows, those tools could help customers move from spotting threats to fixing them. That opportunity is discussed in ServiceNow (NOW) Unveils Autonomous Security to Accelerate Growth.
But first-half operating cash flow dropped to $2.26 billion from $2.39 billion, mainly on higher acquisition-related costs. Cloud costs also rose, and the acquired technology added accounting expenses. Shareholders benefit only if the new business outweighs those costs.
The counterargument is management’s full-year outlook. It calls for subscription revenue growth of 22.5% and an adjusted operating margin of 31.5%, up half a percentage point. If ServiceNow delivers both, it will show that expansion can support profitability despite the costs.
The Lower Multiple Still Requires Earnings Growth
The forward PE of 27.78 means investors pay about $28 for each $1 of annual earnings analysts expect. The trailing reported PE sits near 88. Growing subscriptions and the planned margin gain back up expectations for higher future earnings.
Still, investors cannot safely treat the whole gap between the two multiples as growth. ServiceNow, Inc. (NYSE:NOW) reported quarterly EPS of $0.29, against $0.90 after adjustments that exclude stock compensation and acquired-asset expenses. The earnings basis matters when you compare the two multiples.
The forward PE has dropped sharply over time. It was 62.11 on June 30, 2025, and 37.17 on December 31, before falling to 27.78 now. ServiceNow’s market value has also fallen even as the business expands, which fits investors paying less for expected profits. AI competition and integration costs give investors reasons for caution despite strong sales. The lower multiple shows a smaller premium on expected earnings.
The technology-sector forward P/E medians are 23.30 on adjusted earnings and 30.30 on reported earnings, so the 28x multiple falls between those broad benchmarks. Recurring subscriptions and added services support paying more than for a slower-growing business. But that growth has to generate cash.
Market Sentiment
At the end of Q2 2026, 115 hedge funds held ServiceNow, Inc. (NYSE:NOW), up from 108 in Q1. Their stakes totaled $5.05 billion, down from $5.45 billion. Ownership broadened within the tracked samples, but the lower stake value alone does not prove selling.
AI Growth Supports Holding, but Cash Flow Must Catch Up
At roughly 28x forward earnings, ServiceNow is easier to defend than it was at its former premium, given growing subscriptions and the chance of modest margin gains. However, flat adjusted margins and weaker operating cash flow make the shares a better hold than a fresh purchase. A stronger buying case needs contract growth and better cash generation as the acquisitions settle in. If cloud and integration costs keep absorbing the gains, a larger AI platform may deliver less to shareholders than its sales suggest.
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 this cheapest AI stock.
Read next: Salesforce (CRM)’s AI Numbers Just Gave Benioff His Swagger Back and Workday (WDAY)’s AI Push is Easing Investor Fears, but its Own Guidance Tells a More Cautious Story.
