Why ServiceNow Stock Dropped 20% in June

ServiceNow (NYSE: NOW) stock fell 20% in June, according to data provided by S&P Global Market Intelligence. It's been fairly volatile as the market weighs the impact of artificial intelligence (AI) on its business and how it should be valued today, and the drop was on the heels of a 41% rebound in May.

Does AI help, or hinder?

As a category, software-as-a-service (SaaS) stocks have been falling as the market recognizes that agentic AI can be used to accomplish many of the tasks they're used for for free or more inexpensively. The idea behind SaaS is that clients pay a monthly fee for services that include upgrades and customer support, but if developers can create AI agents that take care of the same work, the SaaS products can become obsolete.

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ServiceNow has been fighting this theory with an AI-included platform that management claims provides great value for its clients. Its Control Tower product, which was already in progress before agentic AI became the threat it is right now, supervises all of a client's operations, including agentic AI, unifying its management and keeping the business, and its AI tools, safe.

Based on the company's current performance, worries about an AI takeover are far overblown. The company is as strong as ever, with $3.7 billion in subscription revenue in the 2026 first quarter, a 22% increase year over year, and $27.7 billion in remaining performance obligations (RPO), up 25%. It's highly profitable, with strong cash flow, and it's guiding for similar performance for the rest of the year.

Its platform is embedded within its 8,500 clients' operations, a strong economic moat with high barriers to entry, and its focus on pre-emptive AI measures protects its business.

The view from the market

The stock was propelled higher in May after a bullish analyst rating, but the market is still weighing the opportunity. On the one hand, it's in a healthy position and reporting outstanding results. On the other hand, the AI landscape continues to shift rapidly, and it's unclear how it will ultimately impact ServiceNow.

Adding to the mix, the company has a dominant position in its category and is growing at double-digit rates, but it's past its upstart phase. The valuation piece fits in there, too -- ServiceNow stock trades at a P/E ratio of 63 and a price-to-sales ratio of 8, which makes it expensive. It's reasonable to see the stock slide at this valuation, and even if it still has a bright future, it comes at a premium.

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.