ServiceNow Stock Plunges 25%: Buy the Dip or Avoid?

ServiceNow (NOW) stock plummeted nearly 25% on Thursday, marking its worst single-day decline since going public in 2012. The sell-off came despite the company reporting strong third-quarter results after Wednesday's close, with subscription revenue climbing 21% year over year to $3.99 billion, beating the high end of management's guidance.

The culprit was the forward-looking guidance. Management projected fourth-quarter growth in current remaining performance obligations (cRPO) of just 18.5%, a notable slowdown from the 20.5% reported in the third quarter. cRPO represents revenue already under contract that the company expects to recognize within a year, making it a key metric for future growth.

CFO Gina Mastantuono attributed part of the slowdown to timing, explaining that strong early renewals in the third quarter pulled deals forward, which will negatively impact fourth-quarter cRPO. She also noted that more on-premise deals from public sector customers will cost about a quarter of a percentage point in cRPO growth, though those deals still count toward revenue.

Despite the explanation, investors focused on the deceleration. cRPO growth has been slowing all year, from 22.5% in Q1 to 21% in Q2 to 20.5% in Q3. The guided 18.5% would be the largest step down in that stretch, raising concerns about the company's growth trajectory and potential competitive pressures from AI.

The stock's history after big drops is mixed. In seven of the last 10 instances where shares fell more than 10% in a day, the stock was higher six months later, with median gains around 15%. However, two drops in 2025 were followed by further declines, reminding investors that a big drop isn't always a buying opportunity.

The sharp sell-off reflects investor anxiety over ServiceNow's growth durability. While the company remains a leader in workflow software, the cRPO slowdown suggests that future revenue growth may be decelerating. This is particularly concerning because cRPO is a leading indicator of subscription revenue, which is the lifeblood of ServiceNow's business model.

Management's explanation that the slowdown is largely due to timing and early renewals is plausible, but it also highlights the unpredictability of large contract renewals. Moreover, the consistent deceleration in cRPO growth throughout 2026 raises questions about whether the company is facing structural headwinds, such as increased competition or saturation in its core markets.

The potential impact of AI is another overhang. If AI agents begin to automate tasks that ServiceNow's software currently handles, it could erode the value proposition of its products and pressure pricing. While this is a longer-term risk, the market is increasingly sensitive to any signs of AI disruption.

On the positive side, the sell-off has made the valuation more attractive. ServiceNow now trades at around 23 times expected 2027 earnings, down from about 30 times the day before. For a company still growing subscription revenue at over 20%, this could be a compelling entry point for long-term investors. However, the stock's performance after the drop will depend heavily on whether the company can meet or beat its fourth-quarter cRPO guidance.