Software-as-a-Service (SaaS) Companies Are Making a Comeback. Here's the Exact SaaS Stock I Recommend Buying Right Now.

Software-as-a-Service (SaaS) stocks plummeted last year as investors got nervous about their obsolescence in the age of artificial intelligence (AI). However, the fears have not been justified, at least until now, and the stocks may have been oversold.

Many SaaS companies have been thriving as they incorporate AI into their operations, offering even greater value to their clients. Palantir Technologies, Shopify, and ServiceNow (NYSE: NOW), for example, all reported outstanding results for their most recent quarters; Palantir Technologies' revenue increased 93% year over year, Shopify's were up 34%, and ServiceNow's rose 24%.

Not every fantastic company makes a fantastic investment, though. Palantir and Shopify are capitalizing on their growth opportunities, but their stocks have a premium price tag. That makes them more susceptible to dropping on bad news, and that's happened. Their stocks are down this year, even though they're back on the rise, and so is ServiceNow's. However, ServiceNow looks like a bargain, while Palantir and Shopify are still quite expensive, which is why ServiceNow is the best deal of the bunch today. Let's take a closer look.

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Workflow automation in the AI era

ServiceNow provides workflow automation services to more than 8,800 enterprise clients, and its platform unifies all of the user's services, including legacy operations and AI agents, into one connected interface. It was one of the companies hit hardest by the SaaS plunge, but it already had an AI deployment model in the works as soon as AI came onto the scene, and it's taking the bull by the horns and demonstrating its value by integrating AI throughout its operations. "The path to value isn't just making AI. It's deploying AI securely across the enterprise," said CEO Bill McDermott on the second-quarter earnings call. That's what ServiceNow does.

Image source: Getty Images.

McDermott also noted that while the market is enthusiastic about the nuts and bolts of AI, or the infrastructure hardware products that are driving market gains, data company IDC says that spending on AI software is going to grow 53% this year, which is 17% higher than expected spend on AI hardware. And while investors debate the benefits of one chip stock over another, ServiceNow provides stability.

"Whichever chip wins, whichever lab wins, whichever price per token regime prevails, the enterprise needs one governed layer of record ... and ServiceNow offers needed certainty in an uncertain stack," McDermott said.

Steady growth and bigger contracts

Revenue increased 24% year over year in the 2026 second quarter, driven by a 24.5% increase in subscription revenue, the kind that makes it a SaaS company. However, ServiceNow works through multiyear contracts, locking in long-term recurring revenue streams. Remaining performance obligations (RPO) increased 21% over last year, implying steady revenue for the coming years. It signed 123 transactions worth at least $1 million in net new annual contract value (ACV), nearly 40% more than last year, and it ended the quarter with 658 customers with at least $5 million in ACV, a 23% increase over last year.

In the second quarter, the company deepened some of its collaborations with top AI companies, including Nvidia, which uses its platform for agentic AI governance, and Amazon, which offers its platform to Amazon Web Services (AWS) cloud clients as a unified architecture.

ServiceNow is also on an acquisition binge, beefing up its platform to handle greater workloads and security threats. It bought cybersecurity company Armis last December for $7.8 billion, and it also acquired identity security company Veza.

A profit powerhouse

As a service-based stock, ServiceNow is highly profitable with strong margins. Operating margin was 29.5% in the second quarter, and free-cash-flow margin was 16%. Management is guiding for a 31.5% operating margin and 35% free-cash-flow margin for the full year. The company has generated $4.7 billion in free cash flow over the trailing 12 months, a number that continues to increase. With AI in the picture, margins could continue to expand, and management expects margins to improve as its recent acquisitions offer a new level of scale.

If ServiceNow continues to grow at similar rates and generate high profits and free cash flow, the stock will eventually catch up, which is why it looks priced to buy right now.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Nvidia, Palantir Technologies, ServiceNow, and Shopify. The Motley Fool has a disclosure policy.