So far, 2026 has been a bad time to be a software stock. The iShares Expanded Tech-Software Sector ETF (BATS: IGV) is a good proxy for software industry performance. As of the Feb. 9 close, the fund is already down nearly 20% in 2026.
This steep decline comes as markets fret over the emergence of new artificial intelligence (AI) software development tools. There is a belief that as software becomes easier to develop using AI, incumbent players in this space will face significant competitive pressures. Still, investors seem to be selling almost everything in software, with little regard to the true threats facing each individual firm.
These broad-based, somewhat indiscriminate sell-offs can be an opportunity, allowing investors to get in on top-tier stocks at basement prices. One software behemoth in particular is worth discussing.
Despite posting impressive financial results, the stock fell approximately 55% from its all-time high by the second week of February. Let’s break down the positives and negatives surrounding ServiceNow (NYSE: NOW) and gain an updated perspective on the tech stock.
ServiceNow: 2025 and 2026 Numbers Paint Impressive Picture
ServiceNow had a strong 2025 on the financial front. Revenue grew by 21%, and adjusted operating margin increased by over 150 basis points to over 31%. Free cash flow rose by 34%, with free cash flow margin coming in at 34.5%. This was a huge, over 300 basis point expansion versus 2024.
The company’s outlook for 2026 is impressive as well. It expects subscription revenue growth between 19.5% and 20%. This includes a 1% contribution from its Moveworks acquisition, indicating that ServiceNow’s core business will see growth between 18.5% and 20%. While a deceleration from previous years, this growth is strong.
ServiceNow also sees operating and free cash flow margins expanding to 32% and 36%, respectively. This comes as the firm is using AI internally to decrease costs. Additionally, the annual contract value (ACV) for the Now Assist AI agent doubled in Q4 to $600 million.
The company is targeting over $1 billion in Now Assist ACV in 2026. Overall, these numbers are very good, with the company continuing to expect near 20% growth and margin expansion.
AI Is a Double-Edged Sword for NOW
Still, reading between the lines raises some concerns. The company sees growth decelerating, even though it has a rapidly growing AI product in Now Assist. This epitomizes one of the key debates around ServiceNow and other software incumbents. The argument against ServiceNow isn’t about new AI tools replacing its offerings. ServiceNow’s software is deeply embedded in the enterprises that use it, so this isn't notable risk, at least near-term.
However, the main way ServiceNow grows revenue is through companies adding more employees or “seats” to their ServiceNow subscriptions. The catch-22 is that the best way for ServiceNow’s customers to benefit from AI is by using fewer people to do the same or more work. If AI allows a company to reduce headcount or slow headcount growth, ServiceNow’s seat-based business model could face a structural growth headwind.
ServiceNow is introducing more consumption-based pricing. This is where the company earns revenue when an AI agent completes a task, for example. However, this has unfavorable economic consequences. Consumption-based revenue is less predictable and, particularly when derived from AI, introduces more variable costs. This takes the form of paying inference costs when employees use AI tools, which could put long-term pressure on margins.
Another risk for software stocks is that the release of new AI tools is likely only to increase. Recently, the release of these tools alone has been enough to send software stocks down.
Wall Street Sees Huge Upside in NOW
Notably, Wall Street analysts are highly bullish on ServiceNow. The consensus price target near $193 implies approximately 86% upside in the stock. The average of targets updated after the company’s latest earnings report is moderately lower, near $182. This figure still implies around 75% upside.
The concerns around ServiceNow are far from trivial. Still, the stock has fallen to a level that feels overly pessimistic. This provides an opportunity in the long term.
But, further AI product releases could put more pressure on ServiceNow shares until the company proves that the market has overestimated their impact.
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The article "ServiceNow's Massive Fall: Analysts Eye +70% Gains Amid AI Risks" first appeared on MarketBeat.
