ServiceNow Stock Under Pressure: (NOW) Faces Earnings Test

ServiceNow's stock (NYSE: NOW) is tailing off today into earnings, down 1.89% in the session to bring the YTD decline to 12.65%. The company is set to release its third-quarter 2025 earnings report today, after the market closes, a moment of truth for the cloud computing giant as it navigates a complex landscape of market fluctuations and ambitious AI initiatives. 

The backdrop to this earnings release is a year of significant volatility for ServiceNow. The stock has swung from a 52-week high of $1,198.09 in late January to a low of $678.66 in early April, only to now trade almost right down the middle. While the price has recovered considerably, it still sits significantly below its peak, leaving investors wondering if the rally has legs.

Analysts are forecasting earnings per share (EPS) of $4.21 and revenues of $3.35 billion for the quarter, representing year-over-year growth of 13.2% and 19.8%, respectively. These figures are ambitious, and any deviation could trigger a significant market reaction. The stakes are high.

The company's second-quarter results offered a glimpse of its potential, with subscription revenues reaching $3.11 billion, a robust 22.5% increase year-over-year. Bolstered by this performance, ServiceNow raised its full-year subscription revenue guidance to between $12.775 billion and $12.795 billion, projecting a 20% annual growth rate. This guidance has instilled confidence in some, but the question remains whether the company can maintain this momentum amid increasing competition and macroeconomic uncertainty.

ServiceNow's strategic pivot towards artificial intelligence (AI) is a crucial element of its growth strategy. The rebranding of the Now Platform as the ServiceNow AI Platform, integrating AI agents across various business functions, signals a significant commitment to this technology. The company has reported impressive early results, including a 50% quarter-over-quarter increase in key AI Pro Plus deals and a quadrupling of Pro Plus deals year-over-year. This AI-driven growth is a key component of the bull case for ServiceNow.

Analysts at TD Cowen recently reiterated their “Buy” rating on ServiceNow, setting a price target of $1,200. Their optimism is fueled by strong U.S. federal government bookings and the encouraging adoption rates of ServiceNow's AI solutions. The consensus price target among analysts is even higher, at $1,115.20, suggesting a potential upside of approximately 19% from the current price. However, it's important to remember that these are just estimates, and the market can be unpredictable.

While the company is generating strong revenue growth, its profit margins are relatively thin. This is partly due to the company's heavy investments in research and development, as well as its aggressive sales and marketing efforts. However, if the company is unable to improve its profitability, it may struggle to justify its high valuation.