ServiceNow Inc. (NYSE:NOW) saw its stock slide 5.8% to $104.85 in early trading Tuesday, erasing roughly $6.7 billion in market value, after International Business Machines Corp. (NYSE:IBM) warned that surging spending on AI servers and storage is squeezing software budgets. The decline occurred even as the broader S&P 500 and Nasdaq opened higher, signaling that investors view IBM's caution as a direct read-through for enterprise software demand.
IBM's preliminary second-quarter revenue of $17.2 billion missed the $17.86 billion LSEG consensus, while adjusted earnings of $2.93 per share trailed the $3.02 estimate. CEO Arvind Krishna noted that customers redirected quarter-end capital spending toward servers, storage, and memory, leaving numerous large deals unclosed, and admitted the company had "faltered" in adapting. This shift in wallet share is now testing ServiceNow's premium valuation, which stood at a trailing price-to-earnings ratio of approximately 61.7 times—the highest among its peers.
ServiceNow's decline was steeper than Salesforce Inc. (NYSE:CRM), which fell 3.0%, but milder than Workday Inc. (NASDAQ:WDAY), which dropped 6.5%. IBM shares themselves plunged 23.9% to $220.94. The market's focus now turns to ServiceNow's second-quarter earnings, scheduled for release after the close on July 22.
The company entered the period with $12.64 billion in contracted revenue due within 12 months (cRPO), equivalent to 3.3 times the midpoint of its $3.815 billion to $3.820 billion subscription revenue guidance. While this backlog provides visibility, it does not guarantee immunity from a spending slowdown. UBS Group AG (NYSE:UBS) raised its price target on ServiceNow to $115 from $100 but maintained a Neutral rating, noting that the Q2 setup suggests stable demand but limited near-term AI momentum. At current levels, the new target implies about 9.7% upside.
ServiceNow's published guidance appears stronger at the headline level than after adjusting for the Armis acquisition. Second-quarter subscription growth of 21% to 21.5% in constant currency and cRPO growth of 19.5% each include about 1.25 percentage points from Armis. Excluding that contribution, underlying subscription growth is roughly 20%, and cRPO growth is about 18.25%—making those the real benchmarks for the upcoming report.
On the positive side, ServiceNow's first-quarter results showed subscription revenue up 22% to $3.671 billion (19% in constant currency), while cRPO increased 22.5% (21% constant currency). The company signed 16 transactions worth over $5 million in net new annual contract value, an increase of nearly 80%, and Now Assist customers spending more than $1 million grew over 130%. CEO Bill McDermott stated that AI growth was "far exceeding even our own expectations."
Profitability also provides a cushion. ServiceNow guided to a 31.5% non-GAAP operating margin and a 35% free-cash-flow margin for 2026, though Armis is expected to reduce those by about 0.75 and 2 percentage points, respectively. However, margins alone are unlikely to be a catalyst.
IBM's warning may prove specific to its product mix and quarter-end execution rather than signaling a broad software freeze. ServiceNow's recurring cloud workflows and security offerings, backed by its $12.64 billion cRPO, could soften short-term volatility. Yet the risk remains that budget reprioritization persists, large deals slip, or AI agents reduce user-seat growth—any of which could overwhelm a modest price target increase given the stock's near 62 times trailing earnings.
On July 22, investors will focus less on reported subscription revenue and more on whether cRPO growth clears 19.5%, whether ex-Armis growth holds near 20%, and what management says about late-June deal timing. Revenue alone may not settle the debate; the market wants proof that ServiceNow can sustain its premium multiple amid shifting enterprise spending priorities.
