Why ServiceNow (NOW) is a Buy Despite AI Fears

Software-as-a-Service (SaaS) stocks have been hammered in 2024 as investors panic about potential AI disruption. The fear is threefold: AI could reduce the number of workers, shrinking per-seat SaaS revenue. Companies might use AI to build custom software in-house, bypassing vendors. And AI developers like OpenAI could attempt to eliminate the traditional software layer entirely.

This has led to broad, indiscriminate selling across the software sector, with few companies spared. ServiceNow (NOW) has not been immune, with its stock down roughly 25% from recent highs, reflecting the market's sector-wide anxiety.

However, the article argues these fears are overblown. SaaS pricing models are likely to evolve from per-seat to consumption-based, addressing workforce changes. Most organizations still prefer not to manage the cost and risk of maintaining custom-built software. And AI is more likely to enhance the value of software that controls data and workflows than replace it.

The core thesis is that while some generic SaaS tools may be disrupted, companies with deep moats built on proprietary data and complex business logic will thrive. The author identifies ServiceNow as a prime example of such a resilient company.

This matters because it separates durable software businesses from vulnerable ones. ServiceNow isn't just another app; it's the central 'system of record' for IT, HR, and customer service workflows at major enterprises. Its value lies in security permissions, custom logic, and audit trails—things AI needs but cannot easily replicate or bypass.

Critically, ServiceNow isn't being disrupted by AI; it's leveraging it for growth. Its Now Assist generative AI suite already has an annual contract value (ACV) of $600 million and is projected to hit $1 billion by year-end. This AI-driven product is a key contributor to the company's sustained 20%+ revenue growth.

Furthermore, ServiceNow is positioning itself at the forefront of the next wave: agentic AI orchestration. Its AI Control Tower and recent acquisitions of cybersecurity firms Armis and Veza aim to secure and manage the complex world of autonomous AI agents. This could become its next major growth engine.

For investors, the sell-off presents a potential opportunity. If the bear case on AI disrupting all software is wrong, then a leader like ServiceNow, which is successfully integrating and monetizing AI, may be significantly undervalued. The stock's decline reflects sector fear, not company-specific failure.