ServiceNow, the cloud software company known for automating corporate workflows, saw its shares plunge about 26% after its third-quarter earnings report. The sell-off came as investors questioned whether the company's heavy investment in artificial intelligence is actually translating into measurable revenue, a concern that analysts at RBC Capital Markets say is now front and center.
RBC noted that ServiceNow beat its own guidance for the quarter but still fell short of what the broader market was expecting. That gap between a company's internal forecast and Wall Street's hopes can happen when expectations run ahead of reality, but in this case it sharpened the focus on AI. Management sounded upbeat about the technology's potential, yet RBC said investors “struggle to square” that optimism with the near-term numbers and outlook.
The bundling problem
One specific issue is how ServiceNow is packaging its AI offerings. RBC pointed out that the company's full-year 2027 subscription revenue growth outlook of 18% includes a 100-basis-point drag from bundling AI delivery services into subscription deals. In plain terms, that means ServiceNow is folding some AI-related services into its subscription contracts, which can make the headline subscription growth rate look slower than it otherwise would be, even if customer demand is holding up.
For everyday investors, this is a subtle but important distinction. Subscription revenue is the lifeblood of software companies like ServiceNow because it is predictable and recurring. When the mix of what's inside those subscriptions shifts—say, from pure software to software plus services—the reported growth rate can become less comparable from quarter to quarter. That makes it harder to tell whether the business is genuinely slowing or just being reported differently.
RBC still pointed to longer-term targets, including $32 billion in subscription revenue by 2030, which suggests the firm believes the AI story has legs. But it cut its price target to $165 from $176 after the print, reflecting the near-term uncertainty.
What it means for investors
The 26% drop is a stark reminder that high expectations can be a double-edged sword. ServiceNow's valuation has long been built on confidence in its future subscription growth, not just its current earnings. When that confidence wobbles, the stock can get hit hard, even if the underlying business is still growing.
RBC's 100-basis-point estimate of the bundling drag might sound small, but for a company trading at a premium multiple, even a modest headwind can lead investors to apply a larger discount until AI revenue shows up more cleanly in reported results. In other words, the market wants to see AI dollars flowing through the income statement, not just hear about them in conference calls.
This dynamic is playing out across the tech sector. Investors are increasingly rewarding companies that can show AI is boosting profits, while punishing those that spend heavily on AI without clear payback. The recent plunge in Alphabet shares after its earnings is a similar example, as is the broader slide in software stocks on AI pricing fears.
For ServiceNow, the path forward is about proving that its AI investments are not just a story but a revenue driver. Each upcoming quarterly report becomes a proof point. RBC kept a positive stance on the stock, but the reduced price target reflects the reality that until AI revenue becomes more visible, the market will likely remain skeptical.
Investors should watch how ServiceNow reports subscription revenue in the coming quarters, particularly any changes in the mix of software versus services. They should also listen for management commentary on AI deal sizes and customer adoption. The company's long-term target of $32 billion in subscription revenue by 2030 is ambitious, but the market will want to see progress toward that goal in the numbers, not just in the narrative.
For now, the lesson is clear: in the AI era, talk is cheap. Investors want to see the money.
