Why ServiceNow Stock Skyrocketed 41% in May

ServiceNow (NYSE: NOW) stock soared 41% higher in May, according to data provided by S&P Global Market Intelligence. It had plunged due to worries about software-as-a-service (SaaS) stocks, but the market is feeling reassured about ServiceNow's future. That was helped by a thumbs-up from a Wall Street analyst.

Not the end for SaaS

It's been a terrible year for SaaS stocks as customers move toward agentic artificial intelligence (AI). Many of the services that SaaS companies provide can be performed by AI agents, pushing some of them toward becoming obsolete. At the very least, AI can speed up some of the processes, so even if clients hang on, they might need smaller packages.

Image source: Getty Images.

ServiceNow was thrown into the bundle, and its stock dropped, even though the company has been demonstrating momentum. However, management has been insisting that it anticipated the rise of agentic AI, and that its Control Tower service was made for this moment. Control Tower, as its name implies, can oversee an organization's entire network of AI agents and services, pulling the data together and making the platform more impactful.

That's one reason ServiceNow's business continues to look compelling. The other is that it's already deeply embedded in its more than 8,800 clients' workflows. It has long-term commitments from top companies, and it won't be easy for the clients to replace ServiceNow's products, which continue to offer high value.

A path forward

The market often makes its moves relative to a company's future, not its past. That makes a lot of sense, since as an investor, you're betting on a company's potential. However, the obvious flaw in that approach is that the future is unknowable. The chasm between the market's vision and the reality is where many investing opportunities lie.

Going with current performance, ServiceNow is in a healthy place. Revenue increased 23% year over year, and remaining performance obligation (RPO), which is the amount of long-term revenue already locked in, was up 25%. Adjusted operating margin was 33%, and adjusted free cash flow margin was 44%.

The outlook is strong as well. Management is guiding for similar revenue growth, adjusted operating margin of 32%, and adjusted free cash flow margin of 35%.

One analyst who sees the path forward is Bank of America's Tal Liani, who recently initiated coverage of the stock and rated it a buy. "ServiceNow is so embedded in the workflow that now that they have the right portfolio to address AI," he said, "they could actually turn it into revenue growth."

The market is starting to agree.

Bank of America is an advertising partner of Motley Fool Money. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ServiceNow. The Motley Fool has a disclosure policy.