ServiceNow CEO Bill McDermott.

Software stocks have begun to rebound following a severe sell-off last week, but the strength is far from sufficient to reverse the sector's overall downturn. Concerns that artificial intelligence could render existing software products obsolete have already spread widely. Several prominent software stocks, including ServiceNow, Adobe, and Workday, are currently trading at their lowest valuation multiples in a decade.

For investors willing to bet on which software companies can successfully navigate the AI transition, this presents a buying opportunity. Many are optimistic about ServiceNow—a company that provides businesses with software for managing internal processes, including IT support and new employee onboarding.

Eric Clark, Portfolio Manager at the ETFMG LOGO fund, stated that ServiceNow possesses significant future growth potential because it acts as a "highly valuable, indispensable intermediary layer" between various corporate databases and software systems.

Clark's fund has held ServiceNow for several years. He pointed out that companies wanting to leverage AI "will all require external support." Due to the complexity of overhauling workflows and building new AI-supported systems, including security measures, businesses often struggle to achieve a return on their AI investments.

Despite a 48% decline in its share price over the past year, ServiceNow's valuation remains higher than those of Adobe, Salesforce, and Workday. According to data from Koyfin, its market capitalization is 6.5 times next year's expected sales, compared to around 4 times for the other three companies. However, this premium is justified: ServiceNow's annual revenue growth is approximately 20%, faster than Adobe (10%), Salesforce (8%), and Workday (13%).

ServiceNow's free cash flow margin is also among the highest in enterprise software, projected to reach 34% in 2025, equating to $4.57 billion. Among the 70 companies covered by the Bessemer Venture Partners Cloud Index, only five perform better.

Sania Opha, a Venture Partner at Bain Capital Ventures, believes ServiceNow's proactive embrace of AI sets it apart.

"When an established leader genuinely and actively embraces new technology, the market shouldn't be so quick to dismiss it," Opha noted.

ServiceNow is already seeing early results in AI. Company executives informed analysts that the annual contract value for its flagship AI product, Now Assist, reached $600 million in the fourth quarter, more than triple its level from March 2025.

One factor causing investor unease is ServiceNow's recent completion of several multi-billion dollar acquisitions: - The $2.4 billion acquisition of enterprise search company Moveworks. - A planned $1.25 billion acquisition of cybersecurity company Veza Technologies. - An announcement just before Christmas of a planned $7.75 billion acquisition of cybersecurity company Armis Security.

As reports from last December indicated, investors have not viewed ServiceNow's acquisition-driven growth strategy favorably.

Following the announcement of the Armis deal, market rumors suggested ServiceNow was pursuing another acquisition. However, CEO Bill McDermott denied this last month, stating he believes "there are no other major white spaces that need to be filled to complete our platform story in security."

Investors, preoccupied with acquisition concerns, may be overlooking the true value of the Armis and Veza deals. While AI agents can significantly boost employee productivity, they also introduce cybersecurity risks. McDermott explained that Armis tracks all devices operating within a company, while Veza controls access permissions. Together, they enable ServiceNow to help enterprises assess their risk exposure in the event of a hacker intrusion.

Tomas Tanguly, General Partner at Theory Ventures, commented last month on The Information's TITV program: "They are being very aggressive with M&A, with the goal of securing their position in the AI era."

Tanguly argued that the view suggesting AI startups will disrupt ServiceNow is not well-founded. "In the IT service management space, there are certainly some emerging startups growing quickly, which may create some pressure, but their annual recurring revenue is all under $10 million. So it's difficult to say that any serious startup is truly threatening ServiceNow."

Like many software companies, ServiceNow faces the risk that AI automation could lead to reduced corporate headcount, potentially lowering software demand. However, the company is transitioning its pricing model, with some services moving to a consumption-based fee structure. Opha pointed out that for ServiceNow, "the more customers use it, the more they can charge."

"Market leadership is critically important," she said. "Once a large enterprise implements a system like Workday or ServiceNow, the implementation cycle typically lasts one to two years. This is because every company has customized processes that need to be embedded into the cloud tools they use. The switching costs are extremely high."