Software Stocks Plunge into Bear Market Amid AI Disruption Fears as ServiceNow Tumbles 11%
ServiceNow Inc. (NYSE: NOW) shares plunged 11% on Thursday, dragging down broader software stocks into bear market territory as investor fears mount over artificial intelligence disruption in the enterprise software sector.[3][1]
ServiceNow’s stock fell sharply to around $118 during premarket trading, marking an 8.32% drop initially, amid a broader sell-off despite the company’s strong fourth-quarter earnings beat released after the previous session.[3] The decline extended losses, with shares trading well below key moving averages and carrying a lofty price-to-earnings ratio of approximately 79.7.[1]
Earnings Beat Fails to Stem the Tide
ServiceNow reported Q4 revenue of $3.57 billion, surpassing Wall Street expectations of $3.53 billion, alongside adjusted earnings of 92 cents per share against forecasts of 88 cents.[2][3] The results highlighted 20.5% year-over-year revenue growth and robust momentum in AI-driven products like Now Assist and CRM offerings.[4]
Looking ahead, the company guided for 2026 subscription revenue between $15.53 billion and $15.57 billion, implying about 21% growth and beating analyst estimates of $15.21 billion.[2] First-quarter subscription revenue is projected at $3.65 billion to $3.66 billion, also above consensus.[2][3]
Despite these positives, the market reaction was negative. Shares dropped over 2% in after-hours trading post-earnings and accelerated Thursday, reflecting concerns over stretched valuations, weak technical signals, and high options volatility.[2] ServiceNow’s stock has lost 28% in 2025 and 15.39% year-to-date, entering a painful downtrend.[2]
AI Partnerships and Acquisitions Under Scrutiny
ServiceNow announced expanded partnerships with AI leaders Anthropic and OpenAI, planning deeper integration of Claude models into its platform.[2] Acquisitions like Moveworks, Veza, Logik.ai, and a massive $7.75 billion deal for cybersecurity firm Armis aim to bolster its AI and security capabilities, contributing to growth forecasts.[2]
The board authorized an additional $5 billion for share repurchases, including an immediate $2 billion accelerated buyback, signaling confidence in long-term value.[2][3] Organic constant currency subscription revenue growth is projected at 18.75% for 2026, exceeding consensus, with 20% growth in current remaining performance obligations.[4]
However, heavy M&A spending has raised eyebrows, pressuring margins and prompting analysts to reassess targets amid a rich valuation environment.[2]
Analyst Divergence and Bear Market Signals
Wall Street opinions are mixed. DA Davidson reiterated a Buy rating, raising FY26 estimates on strong FY25 close and AI momentum.[4] BTIG maintained Buy at $200, while JPMorgan cut its target to $195 from $215 but kept Overweight, citing leadership in cloud IT workflow.[4]
On the bearish side, KeyBanc slashed its target to $115 from $155 over organic growth concerns.[4] Stifel lowered to $180 from $200 while holding Buy; Jefferies cut to $175 from $230; Mizuho to $190 from $210; and Oppenheimer to $175 from $200.[5] Cantor Fitzgerald and Piper Sandler also trimmed targets to $200.[1]
ServiceNow CEO Bill McDermott addressed the disconnect in a Fortune interview, noting a ‘rerating’ of SaaS multiples affecting peers like Adobe, Salesforce, and Workday. ‘ServiceNow got filed with other SaaS companies, and the multiples got dropped,’ he said, urging investors to view it beyond traditional SaaS.[6]
Broader Software Sector in Turmoil
The ServiceNow rout has broader implications, with software stocks entering bear market territory—defined as a 20% drop from peaks—fueled by AI disruption fears. Investors worry generative AI could commoditize enterprise workflows, eroding pricing power and growth for incumbents.[1][3]
Bernstein sees GenAI upside into H2 2026, with Zacks forecasting 19.5% Q4 subscription growth from AI momentum and partnerships.[1] Yet, Jim Cramer called on the CEO to ‘bring his A game’ to explain the malaise.[1] Macquarie holds Neutral at $172, KeyCorp Underweight.[1]
GuruFocus estimates a GF Value of $248.20, implying 114.76% upside from $115.57, based on historical multiples and growth projections.[5] Gross margins remain robust at 78.05%.[4]
Market Context and Investor Sentiment
Thursday’s plunge occurred on below-average volume for recent sessions, amplifying downside momentum.[1] The sector’s woes echo a narrative shift: while AI hype propelled 2024-2025 gains, 2026 brings realism about implementation costs, competition from hyperscalers, and potential workflow automation cannibalization.
ServiceNow’s 21.05% trailing twelve-month revenue growth to $12.67 billion underscores operational strength, but organic guidance slightly missing lofty expectations fueled the sell-off.[4]
As software stocks grapple with AI’s double-edged sword—boon for innovators, threat for laggards—investors await Q1 results and further clarity on monetizing AI investments. ServiceNow’s trajectory could signal if the bear market is a temporary pullback or prelude to deeper reckoning.
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