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Service Now's Earnings Show No Signs Of SaaS Apocalypse

ServiceNow is a very strong enterprise software company with humongous scale and a deep moat of high switching costs and workflow specialization, which will enable it to flourish even with competition from LLMs. The stock is a bargain.

By 

Fountainhead Investing

Published 

April 28, 2026

An excellent quarter from ServiceNow

Service Now had excellent results and also provided decent guidance, the stock looks very attractive. I own some and plan to add on declines:

ServiceNow (NOW) shares have dropped 10% after earnings even after posting good Q1-2026 results. I believe that the market has got it wrong, and over time it will recover from this discounted price. I think the negativity is overdone. Large companies, especially customers of ServiceNow will have enormous switching costs - that is a distinctive competitive advantage for NOW. There are compliance, privacy, regulatory and security issues that cement their long-term contracts and make them preferred vendors at scale. I don't believe AI tools from LLM's can be as effective at such a large scale. And it's not that ServiceNow is not using AI to improve their own products/services, they are and they also have the advantage of proprietary data.

What was the reason for the drop after earnings? 

It had a lower gross margin outlook for 2026, as a result of its Aramis acquisition. That is not a recurring event and margins will recover quite strongly from 2027, and increase after the acquisition.

Q1-2026 results

Adjusted EPS - $0.97, which matched consensus estimates. 

Revenue - $3.77Bn beat estimates of $3.75Bn by $20Mn, for a growth of 22%.

Its RPO (Remaining Performance Obligations) jumped 25% YoYto $27.7B. 

Its current RPO of contracted revenue to be recognized as revenue in the next 12 months, = $12.64B 

Guidance

ServiceNow increased its subscription revenue forecast for Q2-2026 to a range of $3.82Bn to $3.83B, clearing the $3.75Bn estimate. It also guided to full-year subscription revenue ranging from $15.74Bn to $15.78Bn, which also surpasses the $15.54B estimate. It gained traction with more large clients with 16 transactions over $5Mn in  net new annual contract value (“ACV”) in Q1 2026, almost 80% YoY growth, clearly indicating that AI is not making a dent where it matters. It closed Q1 with 630 customers providing more than $5 million in ACV, a growth of 22% YoY.

Margins - Full year subscription adjusted  margins should come in at 81.5% V 82.1% - I think the selloff if it is for this reason is a huge opportunity.

Management was extremely confident for 2026, and I don’t see much reason to doubt that confidence. 

CEO Bill McDermott had this to say:

As new technologies create both opportunity and risk, our two decades of engineering combined with deep business context enable us to orchestrate and secure the agentic enterprise. With this foundation, our AI growth is far exceeding even our own expectations, reinforcing our position as one of the fastest-growing enterprise software companies ever.

CFO Gina Mastantuono added:

In Q1, we exceeded the high end of our topline and profitability guidance metrics, grew free cash flow, and returned capital to shareholders. The early close of our Armis acquisition meaningfully expands our TAM and accelerates our subscription revenue growth trajectory. With agentic AI, workflow orchestration, security, and data fabric converging on a single platform, we believe the most compelling chapter in ServiceNow's growth story is just beginning.

These are the competitive advantages that make ServiceNow attractive:

  1. AI Moat: ServiceNow uses its own LLMs for actively selling Agentic AI solutions, Now Assist, its generative AI suite, should reach $1Bn in ARR this year, up 67% from $600Mn in 2025. 
  2. Seat vs. Outcome Pricing: ServiceNow’s hybrid pricing shift has led to 50% of all new business coming from non-seat-based pricing models. It is successfully pivoting to a consumption-based model.
  3. System of Record gives it a lot of proprietary data: As the service desk it has a ton of data from support tickets in its system from large enterprise customers.
  4. Cost reduction from AI agents: AI agents have begun resolving tickets replacing humans, especially the repetitive ones, with humans only stepping in for escalations, and one-offs.  
  5. Workflow specialization: ServiceNow’s workflows are in many highly regulated and complex industries such as finance, healthcare, and government. These are not commodity workflows that can be easily replaced.

ServiceNow Valuation:

A $16Bn enterprise software company growing earnings at 18% in 2026, and 21% for the next two years, at 20x earnings, and sales at 22% in 2026, and 18% for the next two years valued at only 5.7x sales is a good bargain. Yes, Artificial Intelligence solutions, through cheaper, faster coding will make a difference to smaller enterprise software companies, but not to the large companies that have solid competitive advantages of scale, domain expertise, proprietary data, compliance and regulatory knowledge. The switching costs are enormous, and the quarterly results suggest nothing remotely different. 

I continue to hold and would add on declines.