How ServiceNow Stock Falls By 50%?

Despite significant growth in revenue and profits, ServiceNow (NYSE: NOW) performance has raised concerns among investors due to its lofty valuation, intensifying competition in artificial intelligence (AI) workflows, reliance on enterprise IT spending, and broader macroeconomic pressures.

Over the last four years, ServiceNow has added nearly $5 billion in revenue, taking annual sales from about $5.9 billion in 2021 to almost $11 billion in 2024. Net income has also expanded, with trailing twelve-month profits reaching $1.66 billion, supported by industry-leading gross margins of nearly 79% and free cash flow of $3.85 billion. However, during this same stretch, the stock has only gained about 6.8% over the past year and remains down close to 17% year-to-date. Its price-to-earnings (P/E) ratio has compressed from above 170x during the post-pandemic tech boom to around 110x today, yet still trades at a sizable premium compared to peers like Microsoft at 37x or Oracle at 54x.

In 2021, ServiceNow was valued at an extraordinary multiple of over 170 times earnings, reflecting sky-high expectations for growth. Today, even with the P/E down to roughly 110x trailing and 60x forward earnings, investors are increasingly questioning whether such a valuation is sustainable, especially as growth in subscription revenue moderates from peak levels.

Additionally, we also have a counter scenario on Why is ServiceNow Stock Surging?. Indeed, we believe this broad range of upside and downside potential represents a simple fact, that NOW is a volatile stock. That said, if you seek upside with lower volatility than individual stocks, the Trefis High Quality portfolio presents an alternative — having outperformed the S&P 500 and generated returns exceeding 91% since its inception. Separately, see – What’s Next After A 2X Surge In Applied Digital Stock?

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Core Challenges and Investor Concerns

A number of factors contribute to investor apprehension, creating potential headwinds for ServiceNow’s stock.

Slowing Momentum in Enterprise Cloud Spending

ServiceNow has long been viewed as a leader in workflow automation and enterprise digital transformation, generating subscription revenues with renewal rates above 98%. Yet its growth trajectory, while still strong, is showing signs of deceleration. In Q2 2025, the company reported $3.22 billion in revenue, up 21% year-over-year, alongside adjusted EPS of $4.09, both ahead of expectations. However, compared with peers in adjacent cloud markets, such as Microsoft Azure’s 39% growth or Google Cloud’s 32%, ServiceNow’s expansion appears more measured, raising questions about whether it can maintain momentum in a competitive environment.

The AI Transformation Race

Much like Amazon with AWS, ServiceNow’s future is increasingly tied to AI adoption. Its “Now Assist” generative AI tools and integrations with AWS Bedrock highlight its push into intelligent automation. But rivals including Microsoft and Salesforce are embedding AI directly into widely adopted platforms, often in ways that appear simpler for enterprise customers to deploy. This has left some investors concerned that ServiceNow’s AI strategy, while compelling, may not deliver enough differentiation to justify its premium valuation.

Economic Headwinds and IT Budget Risks

Broader economic pressures also loom large. Inflation, tighter corporate budgets, and uncertainty around global growth could slow enterprise IT spending—directly impacting ServiceNow’s subscription-driven model. While renewal rates remain resilient, the risk is that new deal flow could cool if CIOs delay digital transformation initiatives. With the stock already priced for perfection, even small cracks in growth could lead to outsized corrections.

Historical Performance During Downturns

ServiceNow’s stock has shown volatility during past market downturns, at times performing worse than the S&P 500 index.

Inflation Shock (2022)

• NOW stock experienced a peak-to-trough decline of 51.3%.
• In comparison, the S&P 500 index declined by 25.4%.

COVID-19 Pandemic (2020)

• NOW stock saw a decline of 30.2%.
• The S&P 500’s peak-to-trough decline was 33.9%.

The significant 51% drawdown in 2022 suggests that a substantial decline from current levels is not unprecedented. This history of volatility, combined with a high stock price, contributes to investor caution. See – Buy or Sell NOW Stock – for more details.

Takeaway

In summary, ServiceNow remains a best-in-class software provider, with consistent revenue expansion, strong cash generation, and margins that most enterprise software peers envy. But at nearly 110x trailing earnings, the stock remains expensive. Its revenue has grown at a healthy 20%+ pace versus just 5% for the broader S&P 500, but sustaining such growth rates will be difficult as competition intensifies and macroeconomic risks weigh on corporate IT budgets. At current multiples, even modest disappointments—whether in AI adoption, subscription renewals, or spending trends—could trigger meaningful downside. The stock’s muted performance in 2025, despite upbeat earnings, reflects this heightened investor caution.

The rich valuation of NOW stock could limit its upside potential in the near-to-mid term. As an alternative, the Trefis Reinforced Value (RV) Portfolio, which has outperformed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to produce strong returns for investors. Why is that? The quarterly rebalanced mix of large-, mid- and small-cap RV Portfolio stocks provided a responsive way to make the most of upbeat market conditions while limiting losses when markets head south, as detailed in RV Portfolio performance metrics.

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