ServiceNow’s (NOW) stock has dropped about 32% this year, but Morgan Stanley says the fundamentals tell a different story. Demand remains intact, and the company’s AI strategy is starting to show up in real revenue.
The debate now is whether ServiceNow can translate AI adoption, backlog strength, and enterprise expansion into durable revenue and higher per-customer spend.
ServiceNow’s Now Assist shifts into paid expansion engine
ServiceNow’s AI push crossed an important threshold in Q4 with Now Assist’s net new ACV more than doubling year over year. This is one of the clearest signs that generative AI is moving from just another feature to a paid product layer.
That matters at ServiceNow’s scale. The company generated $3.466 billion in Q4 subscription revenue, up 21% year over year, so AI doesn’t need to be massive to have an impact. Even modest attach rates can extend growth and help offset the natural slowdown that comes with size.
Morgan Stanley said partner checks showed no meaningful change in demand, with performance in line with or slightly above expectations. Early Q1 feedback ahead of earnings on April 22 suggests Now Assist remains a meaningful contributor, with usage-based consumption starting to ramp as customers move beyond initial token allocations.
If that trend holds, AI monetization would expand beyond initial ACV into recurring usage revenue.
Backlog growth still outpaces reported revenue
ServiceNow’s clearest demand signal is its backlog. In Q4, current remaining performance obligations rose 25.0% year over year to $12.85 billion, while total RPO increased 26.5% to $28.2 billion, both ahead of reported growth.
That matters because RPO (remaining performance obligations) and cRPO (current RPOs expected to be realized as revenue in the next 12 months) reflect signed customer commitments.
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If budget pressure were meaningfully impacting the business, it would show up first in contracted spend, which it hasn’t. Backlog growing faster than revenue suggests customer demand remains intact.
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In Q1, investors will look for stable renewal rates, no meaningful deal slippage, and continued cRPO growth outpacing subscription revenue through Q1 and into fiscal 2026.
Backlog only supports the case if it converts. If contracted revenue continues to flow through and near-term targets hold, demand is likely stronger than the stock’s reaction suggests.
Bigger customers are buying more workflows says Morgan Stanley
ServiceNow’s growth is coming less from new logos and more from expanding within large enterprises. In Q4, the company closed 244 deals over $1 million in net new ACV and ended with 603 customers above $5 million in ACV, up about 20% year over year.
Those are the most valuable customers to win. Large enterprises bring stronger pricing power, broader product adjacency, and lower churn risk, which increases lifetime value.
Morgan Stanley said workflow expansion remains strong across large enterprises, especially in ITOM, SecOps, and CSM, which turns ServiceNow into a multi-workflow platform rather than a single-use tool.
That also fortifies the moat. As the platform spreads across teams, it becomes harder to replace and easier to expand, especially in complex organizations that prefer vendor consolidation.
The focus now is on deal quality. Investors want to see that large wins reflect multi-workflow expansion rather than one-off purchases. Continued evidence of cross-sell momentum would point to growth that is embedded in the installed base and less sensitive to macro conditions.
What could drive $NOW shares higher
- Now Assist adoption shifting from pilot programs to sustained paid attach.
- Higher wallet share within existing customers and stronger retention from deeper enterprise adoption.
- cRPO and total RPO continuing to outgrow reported revenue, reinforcing visibility.
- More $1M+ deals tied to multi-workflow expansion.
- Growth in $5M+ customers, expanding cross-sell opportunities across the platform.
What could pressure $NOW stock
- Slower token usage, weakening the expected consumption revenue upside.
- Large enterprise deals being narrower than expected, limiting cross-sell potential.
- Lower lifetime value expansion across the installed base.
- Multiple compressions if investors stop viewing ServiceNow as a leading AI platform.
Key takeaways for investors
ServiceNow’s AI story has moved from concept to commercial traction. In Q4, Now Assist net new ACV more than doubled year over year, while subscription revenue still grew 21% to $3.47 billion. AI is starting to look like a paid growth layer on top of a large recurring base, not just a feature upgrade.
The core demand picture also remains firm. cRPO rose 25% to $12.85 billion, and total RPO climbed 26.5% to $28.2 billion, both ahead of reported growth, while large customers kept expanding across the platform.
Morgan Stanley believes the bull case depends on AI monetization and backlog converting into sustained revenue growth.
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