ServiceNow Trades at Premium Valuation: How to Play the Stock

ServiceNow NOW is currently trading at a high price-to-earnings (P/E) multiple, above the Zacks Computers - IT Services industry. ServiceNow’s forward 12-month P/E ratio sits at 21.76X, higher than the industry’s forward 12-month P/E ratio of 16.80X. The Zacks Value Score of D also suggests that NO…

ServiceNow NOW is currently trading at a high price-to-earnings (P/E) multiple, above the Zacks Computers - IT Services industry. ServiceNow’s forward 12-month P/E ratio sits at 21.76X, higher than the industry’s forward 12-month P/E ratio of 16.80X. The Zacks Value Score of D also suggests that NOW stock is overvalued.

The stock trades at a premium valuation to its peers as well, including Microsoft MSFT, Salesforce CRM and Oracle ORCL. At present, Microsoft, Salesforce and Oracle have P/E multiples of 21.52X, 11.11X and 17.75X, respectively.

NOW Forward 12-Month P/E Ratio

ServiceNow’s elevated valuation raises concerns about whether the stock can justify such lofty multiples. Considering the premium valuation, investors must be wondering whether they should buy, sell or hold the stock, especially amid near-term challenges.

NOW Faces Integration Risk From Multiple Acquisitions

ServiceNow is integrating several acquisitions at the same time, including Moveworks, Armis, Veza and Pyramid Analytics. While these acquisitions add new AI, security and data capabilities, they also increase execution risk.

As a result of its back-to-back acquisitions, ServiceNow will need to integrate the acquired products, employees, technologies and sales teams into its existing business. As a result, the company will incur higher costs. These costs are expected to hurt the company's profitability before the benefits of synergies from acquisitions are fully realized.

For instance, the Armis acquisition is also expected to put pressure on profitability in 2026. Management expects Armis to reduce 2026 subscription gross margin by 25 basis points, operating margin by 75 basis points and free cash flow margin by 200 basis points. For the second quarter of 2026, Armis is expected to reduce its operating margin by 125 basis points.

Management expects efficiency gains to offset these pressures over time and eventually eliminate the margin impact. However, if customer adoption is slower than expected, the revenue contribution from these businesses could take longer to materialize.

Middle East Deal Delays Hurt NOW's Prospects

Several large sovereign cloud and on-premise deals in the Middle East were delayed during the first quarter of 2026 due to the ongoing regional conflict. Management stated these delays reduced first-quarter subscription revenue growth by approximately 75 basis points. These deals are recognized differently from recurring subscription contracts, so even a small number of delayed transactions can have a noticeable impact on quarterly revenue growth.

Although the delays were due to timing-related issues and not due to a change in underlying demand, the situation highlights that large government and sovereign cloud deals can be affected by geopolitical events. If geopolitical tensions continue, additional delays could affect the timing of future revenue recognition and result in significant volatility in the company's overall growth.

Key Technical Indicator Signals Bearish Trend for NOW

ServiceNow shares have dipped below their 200-day moving averages, a bearish technical signal that indicates the potential for continued downward pressure in the short term.

NOW 200-Day Simple Moving Average

The above-mentioned factors seem to have weighed on investors’ sentiments, as reflected in the underperformance of NOW’s share price over the past 12 months.

NOW stock has plunged 49.6% over the past 12 months, underperforming the industry’s decline of 36%. The stock has outperformed its industry peers as well, such as Microsoft, Salesforce and Oracle. Over the past 12 months, shares of Microsoft, Salesforce and Oracle have plunged 22.9%, 40.2% and 39.8%, respectively.

12-Month Price Return Performance

Despite the above-mentioned challenges, it’s not all doom and gloom for ServiceNow.

Strong Demand for AI Control Tower Boosts NOW's Prospects

ServiceNow is seeing strong demand for AI Control Tower. Rising adoption of AI tools is creating the need for visibility into how these systems operate, what actions they take and whether they comply with company policies. This is where ServiceNow's AI Control Tower comes in to address the above-mentioned requirements and help customers monitor, manage and govern AI agents from a single platform.

Average AI Control Tower deal sizes more than doubled sequentially in the first quarter of 2026. Per management, customers view AI governance more as a requirement rather than an optional feature. Further, as AI agents become more capable and are used across more business functions, they need a platform that can monitor and govern these systems, which should help drive demand for AI Control Tower.

ServiceNow believes its large workflow platform gives AI Control Tower a significant advantage. Management stated that its systems have been trained on more than 95 billion workflows and over seven trillion transactions. Through its Context Engine, AI Control Tower can use information from existing workflows, approvals and business rules to help customers manage AI-driven actions. This allows organizations to manage AI-driven actions using existing business controls and governance frameworks.

Rising adoption of ServiceNow's AI products is boosting the demand for AI Control Tower. For instance, Now Assist is helping generate interest in AI Control Tower as customers expand AI deployments across their organizations. Further, with rising AI adoption, governance becomes more important, and this positions AI Control Tower to become a meaningful contributor to ServiceNow's future growth.

The Zacks Consensus Estimate for ServiceNow's 2026 and 2027 revenues indicates year-over-year growth of 21.9% and 18.1%, respectively.

Conclusion: Hold NOW Stock Right Now

ServiceNow continues to benefit from strong demand for AI governance as more companies deploy AI agents across their operations. Larger deal sizes for AI Control Tower reflect growing adoption of NOW’s workflow platform. NOW’s large workflow platform and Context Engine give it an advantage as customers deploy more AI agents and provide a favorable long-term growth opportunity for the company.

However, ServiceNow faces several near-term risks, such as geopolitical headwind in the Middle East and dilutive impact on margins as a result of its back-to-back acquisitions, which could hurt NOW’s prospects in the near term. Further, the company’s premium valuation warrants a cautious approach to the stock.

Currently, ServiceNow carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

7 Best Stocks for the Next 30 Days

Just released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."

Since 1988, the full list has beaten the market more than 2X over with an average gain of +23.9% per year. So be sure to give these hand picked 7 your immediate attention. See them now >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report