Software stocks aren’t for the faint of heart today: Artificial intelligence is disrupting the industry, and the shares of software vendors have fallen off a cliff. While this is injecting uncertainty, we think the market is overreacting to the risk that AI poses to the best software companies. As a result, we think there’s a buying opportunity for long-term investors who are comfortable with this uncertainty.
ServiceNow is one of our top software stock picks to buy now. In a recent episode of The Morning Filter podcast, Morningstar Chief US Market Strategist Dave Sekera noted about ServiceNow: “Their entire business model is made to automate processes. And that’s really what AI, at the end of the day, is used for.” In fact, we think ServiceNow has done an exceptional job of monetizing AI within its portfolio, suggesting that it will be able to successfully defend itself against the threat of AI. The stock trades in 5-star range, which means it’s significantly undervalued even after accounting for uncertainty (all returns in this article are measured on a US dollar basis).
ServiceNow has been successful so far in executing a classic land-and-expand strategy. First, it built a best-of-breed software-as-a-service solution for IT service management based on being modular and flexible, having a superior familiar user interface, offering a way to automate a wide variety of workflow processes, and becoming a platform to serve as a single system of record. Next, it moved into human resources service delivery, customer service, finance, and operations. The company then introduced more sophisticated and industry-specific versions of its core solutions. ServiceNow was one of the first software companies to release generative AI solutions. Each of these products carries higher pricing to help drive incremental growth and boost margins.
Key Morningstar Metrics for ServiceNow
- : USD 200Fair Value Estimate
- : 5 StarsStar Rating
- : WideEconomic Moat Rating
- : HighUncertainty Rating
Economic Moat Rating
ServiceNow’s wide economic moat is derived from high customer switching costs in the subscription business, which accounts for most of the company’s revenue. We believe customers value each of ServiceNow’s myriad solutions on a stand-alone basis, but the product portfolio is highly complementary and tightly integrated, making the platform more compelling than a point solution. In our opinion, the platform approach coupled with deep and wide add-on offerings is critical, as customers are usually looking to consolidate vendors. As ServiceNow offers a wider set of related and best-in-class solutions, we believe it becomes more deeply entrenched with its customers as they adopt multiple products.
Read more about ServiceNow’s moat rating.
Fair Value Estimate for ServiceNow Stock
Our USD 200 fair value estimate implies a 2026 enterprise value/sales multiple of 13 times and an adjusted price/earnings multiple of 47 times. We model a five-year revenue compound annual growth rate of 17%. We see subscription revenue as driving almost all growth. In our view, top-line growth will be driven by continued new logo wins and rapid upselling to those clients once landed. Customer service, HR delivery, security operations, and platform should contribute meaningfully to growth over the next five years. We believe the market is large and growing and can support ServiceNow’s expansion in the coming years. We expect non-GAAP operating margin to expand from 31% in 2025 to the mid-30s over the next five years, driven by improving scale and expanding sales of premium products.
Read more about ServiceNow’s fair value estimate.
Risk and Uncertainty
Generative AI is an emerging risk for software vendors. In the most pessimistic view, AI can be considered a threat to certain types of software. More positively, AI can be considered an opportunity for incumbent vendors to embed their own AI solutions within their platforms, potentially enhancing revenue streams and strengthening their moats. ServiceNow has been among the most successful at monetizing AI in its portfolio. Furthermore, it provides a system of record beyond engagement and action, all of which bodes reasonably well for ServiceNow to defend itself against the possible threat from AI.
Read more about ServiceNow’s risk and uncertainty.
ServiceNow Bulls Say
- A robust portfolio has rapidly propelled ServiceNow to the leadership position in IT service management. This dominance has enabled it to expand into the system of record for the entire IT function.
- ServiceNow has organically expanded into other areas outside IT, including customer service and HR service delivery, resulting in a more durable growth profile.
- ServiceNow’s excellent profitability and free cash flow generation have enabled solid growth, strengthened the platform, and allowed for acquisitions and share buybacks.
ServiceNow Bears Say
- As ServiceNow expands deeper into areas outside of core IT functions, it has encountered a wider set of competitors. Some of these peers are well equipped for battle.
- ServiceNow has more recently turned to acquisitions, including larger deals, to expand its reach. Increased acquisition activity raises integration risks and muddies the company’s organic growth narrative.
- Rapid growth, especially given the company’s scale, will inevitably slow, which may have an impact on valuation.
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This article was compiled by Susan Dziubinski and Sylvia Hauser. Data as of Feb. 17, 2026, close unless otherwise noted.
