Software stocks make a comeback! ServiceNow expects strong revenue growth as AI helps reduce costs

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ServiceNow has issued strong revenue growth guidance, indicating that its artificial intelligence strategy is helping the company cut costs and boost profitability—a shot in the arm for the software sector, which has recently come under pressure due to unclear commercialization returns from AI.

The software maker said in a statement on Wednesday that it expects subscription revenue for the quarter ending in December to reach around $3.43 billion. Analysts’ average expectation was $3.41 billion. At the same time, its metric for recent contract sales (current remaining performance obligations) is expected to grow by 23%, also beating market expectations.

Buoyed by this news, ServiceNow’s shares rose about 4% in after-hours U.S. trading. Previously, the company's stock had fallen by 14% so far this year due to rising investor concerns about whether application software providers could achieve substantial financial returns from AI.

The company’s CFO, Gina Mastantuono, pointed out in the statement that the internal implementation of AI is helping the company cut costs and increase profits, providing strong evidence of AI’s real commercial value in enterprise applications. Subscription sales make up almost all of ServiceNow’s revenue.

Earnings Exceed Expectations, Bolstering Investor Confidence

Alongside the positive guidance, ServiceNow’s third-quarter results also topped Wall Street expectations. Financial reports show that the company’s third-quarter subscription revenue rose almost 22% year-over-year to $3.3 billion. Adjusted earnings per share, excluding certain items, were $4.82. Both of these key indicators are above market expectations. Analysts had previously forecasted third-quarter subscription revenue of $3.27 billion and adjusted earnings per share of $4.27 for ServiceNow on average.

CFO Gina Mastantuono’s statement made it clear how AI is helping reduce company expenditure, directly strengthening investor confidence in returns on AI investment.

Currently, leading technology platforms including ServiceNow, Salesforce Inc., and Microsoft Corp. are fiercely competing to integrate generative AI capabilities into their product lines. ServiceNow focuses on providing software for enterprises to organize and automate their human resources and IT operations, and the application of AI to its core business is a key strategy.

Intensifying Competition in Core Markets

Despite the optimistic outlook, ServiceNow may soon face fiercer competition in its core IT operations market. According to reports, rival Salesforce announced earlier this month that it will focus on developing IT service management software, signaling a direct entry into ServiceNow’s home turf.

Meanwhile, ServiceNow has also been working to expand its suite of tools into new product categories, such as customer management. Notably, in July this year, both ServiceNow and Salesforce each invested about $750 million in contact center software company Genesys Cloud Services Inc., highlighting a complex relationship of both competition and cooperation between the two parties in certain areas.

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