ServiceNow: The 2nd Wave of AI Spending Is Here

Key Points

• ServiceNow's Q2 results affirm the second wave of AI spending is at hand, and it's a tidal wave.
• The company's full-stack, agentic AI is in high demand.
• Analysts are raising targets, which could lead the market to realize double-digit gains this year.

ServiceNow’s NYSE: NOW Q2 results and guidance update are a wow moment for investors and an eye-opener for those waiting on AI’s second wave. The second wave, the rise of agentic services and the application of AI, is expected to be a larger, faster-growing, and longer-sustained rally than infrastructure, which has been a rocket-ship of gains for technology investors.

The takeaway today is that ServiceNow’s results outperformed guidance and analysts' consensus forecasts in all metrics. Guidance was improved to align with them, and the momentum indicates that outperformance is very likely. 

Agentic AI Drives Demand for ServiceNow’s Product

ServiceNow had a robust quarter considering its size. The megacap grew its revenue by 22.4% to over $3.2 billion, outperforming MarketBeat’s reported consensus by more than 300 basis points. The strength was driven by subscriptions and large clients, with subscription revenue up 22.5% and clients contributing more than $20 million in contract value, up 30%. 

Margin news is also good, with revenue leverage compounded by internal efficiency. The net result is that adjusted EPS grew by 30% compared to the 22.4% top-line growth and outperformed by an eye-popping margin. Outperformance topped 1450 basis points, and the strength is expected to continue in Q3 and the remainder of the year. 

The company raised its guidance for Q3, underpinning expectations for a strong year, forecasting about 20% growth compared to the prior year. The guidance is likely cautious, given the 22.4% top-line growth, accelerating deal volume, and improving quality, as well as the RPO, which outpaces revenue.

The current remaining performance obligation is up 24.5%, and the total is up 29%, suggesting sustained, if not accelerating, growth as the year progresses. 

ServiceNow Builds Shareholder Value and Leverage for Gains

ServiceNow’s business is profitable, and it generates free cash flow. A portion is used to buy back shares, which is insufficient to offset dilution, but almost, and the remainder is for reinvestment. As of the end of Q2 2025, the company’s efforts resulted in increased cash and assets, steady net debt, low leverage, and increased equity.

Equity improved by 13% YTD and will likely continue to grow as the year progresses. Regarding leverage, the company utilizes debt but has an investment-grade rating, resulting in relatively low costs. The net leverage in Q3 is about 0.1x the equity, which is a healthy ratio. 

Analysts are leading this market higher, providing support with increasing coverage, a firming sentiment, a Moderate Buy rating, and an uptrend in the consensus price target. The price target is a critical factor, having risen by more than 30% in the last year, with revisions leading to a high-end range.

The high-end range is $1,300, affirmed by the post-release activity, which includes several price target increases issued within the first twelve hours. Likewise, the institutional trends are bullish.

They own 87% of the stock and buy on balance every month in 2025, netting about $2 in shares for every $1 sold. 

The Technical Outlook: ServiceNow Is Poised to Move Higher

ServiceNow’s stock price surged in the wake of the release but struggled to break through resistance at the top of the near-term range. Resistance at $1,050 may keep this market in check soon, but long-term trends suggest it won’t. 

Once crossed, the next target is near $1,150, and it may be reached quickly. Assuming that subsequent earnings reports align with the new guidance, analyst trends will remain bullish. New highs will be set, potentially reaching as high as the $1,300 level, representing a 30% gain.