ServiceNow shares tumbled approximately 6% in midday trading Wednesday, leading a broader sell-off in software stocks that has called into question the durability of the sector's recent AI-driven rally. The stock, which had bounced back sharply in recent weeks, fell $7.51 to $120.14, after opening at $127.99 and hitting a session low of $119.32.
The decline was part of a wider downturn in technology shares, with the iShares Expanded Tech-Software Sector ETF sliding 4.3%, far outpacing the 0.7% drop in the SPDR S&P 500 ETF and the 0.4% decline in the Invesco QQQ Trust. U.S. stocks pulled back from record highs, with software names among the hardest hit as recent leaders saw heavy selling pressure.
Software stocks had been regaining favor after weeks of anxiety that artificial intelligence might displace traditional software functions. Investors have been rebuilding positions on bets that AI agents will still require robust business systems to manage them. According to Reuters, the software ETF has rebounded nearly 42% from its April low and is now down less than 2% for the year, reversing an earlier 30% decline.
“The market has come so far, so fast that it is open to almost any reason to pull back,” said Eric Parnell, chief market strategist at Great Valley Advisor Group, in comments to Reuters.
ServiceNow has become a bellwether in the debate over AI’s impact on enterprise software. The Santa Clara, California-based company provides cloud-based workflow automation software for large corporations, handling tasks such as routing, approval, automation, and auditing across departments. While not an AI model company itself, ServiceNow is seen as a critical backbone for business workflows, and bulls argue that this makes it indispensable in an AI-driven world.
Peer software stocks also suffered. Salesforce dropped 4.4%, Microsoft fell 3.8%, and Datadog lost 7.3%, as investors sought to differentiate between companies that can drive AI adoption into higher usage and pricing versus those that may lose out as automation reduces seat-based spending.
Analysts remain divided on the sector’s outlook. Daniel Morgan of Synovus Trust said AI is “remapping the industry rather than destroying it.” Thomas Blakey at Cantor Fitzgerald pointed to strong results from Snowflake and MongoDB as evidence that “software companies will be beneficiaries of AI.” Nvidia’s Jensen Huang added to the positive sentiment earlier this week, calling it an “incredible time to be a software company.”
ServiceNow had received a fresh buy rating from Bank of America analyst Tal Liani in May, who set a $130 price target upon resuming coverage. Liani said ServiceNow could “benefit from, rather than be replaced by” AI, citing its AI Control Tower, Action Fabric, hybrid pricing model, and acquisitions of Armis and Veza as key elements of its enterprise AI governance stack.
The company reported strong first-quarter results, with subscription revenue up 22% to $3.67 billion and total revenue also rising 22% to $3.77 billion. Current remaining performance obligations increased 22.5% to $12.64 billion. CEO Bill McDermott stated that growth from AI is “far exceeding even our own expectations.”
However, investors remain cautious. ServiceNow’s premium valuation leaves it vulnerable if enterprise software budgets weaken, if AI pricing takes time to materialize, or if automation reduces seat-based sales before usage fees can compensate. The company noted that first-quarter subscription revenue growth faced a 75-basis-point headwind from delayed on-premise deals in the Middle East, underscoring that large contract timing still matters.
Wednesday’s sell-off puts the software sector’s year-to-date rally to the test. The fundamental question remains: will AI make enterprise software cheaper, or will it become the essential layer for companies seeking to automate more work? The answer is still uncertain, and ServiceNow shares are caught in the middle.
