ServiceNow's 14% Plunge Signals Broader AI Threat to Software Valuations

A brutal selloff in enterprise software stocks on Tuesday, sparked by a 14% plunge in ServiceNow Inc. (NYSE:NOW) despite a strong earnings report, signals a deepening investor crisis of confidence regarding the sector’s vulnerability to artificial intelligence. The rout was widespread, with Atlassian Corp. falling over 10%, while Salesforce Inc., Adobe Inc., and Workday Inc. all dropped more than 7%, wiping out billions in market value and showing a fundamental re-evaluation of the industry's decade-long growth story.

“I’ve never seen a group that literally goes down when they report good numbers, when they report bad numbers, and then when they report any numbers,” Steve Eisman, the investor famed for “The Big Short,” said on his podcast this week, comparing the dynamic to the pre-crisis financial sector.

The paradox was perfectly captured by ServiceNow’s results. The company beat Q4 2025 earnings estimates by 3.37% and grew revenue 20.7% year-over-year to $3.57 billion, according to its latest report. Yet, the stock suffered its worst single-day drop in over a year, falling from a year-end 2025 price near $153 to below $100. The selloff hit other software giants hard, with Salesforce and Adobe down over 8%, Snowflake Inc. falling more than 6%, and Microsoft Corp. shedding 3.5%.

The fundamental fear driving the selloff is that generative AI platforms from companies like OpenAI and Anthropic could render many traditional software-as-a-service (SaaS) products obsolete. Enterprises may choose to license foundational models and build their own solutions or buy them directly from AI-native firms, bypassing the incumbents and eroding the seat-based subscription models that have fueled the sector's growth.

A Sector Staring Into the Abyss?

The market is grappling with what Baird software analyst Rob Oliver described as four distinct bear cases. First, AI and so-called "vibe coding" dramatically lower the cost and complexity of building software, reducing barriers to entry. Second, as tech companies and other corporations cut headcount—with prediction markets pricing an 84% chance of 2026 tech layoffs exceeding 2025's 447,000—the addressable market for seat-based licenses shrinks. Third, annual price hikes that were once automatic are now meeting fierce resistance.

Finally, the biggest fear is disintermediation. "OpenAI and Anthropic may not need the incumbents at all, choosing instead to sell directly to enterprises," Oliver told Eisman. This structural headwind has crushed valuations. Oliver noted the average price-to-sales multiple in his coverage universe has been nearly cut in half, from 6.5x to 3.5x next-12-month revenues, placing the group at a rare discount to the S&P 500. "If I called a software investor and led with valuation, they’d hang up on me," Oliver said, explaining that a cheap multiple in software has historically signaled a broken company, not an opportunity.

The Incumbent's Defense: AI as a Moat

Not everyone is convinced of the sector's demise. Strategists at JPMorgan pushed back against the panic in a February note, arguing "the market is pricing in worst-case AI disruption scenarios that are unlikely to materialize." The bank's view is that incumbents actively embedding AI into their platforms are more likely to be complements to the new technology wave, not its casualties. They specifically named ServiceNow as an AI-resilient name worth buying on weakness.

ServiceNow’s own results provide the strongest evidence for this thesis. The company’s generative AI suite, Now Assist, saw its net new annual contract value (ACV) more than double year-over-year in the fourth quarter. More importantly, the number of large transactions accelerated sharply, with deals over $1 million in net new ACV growing from 72 in Q1 2025 to 244 in Q4. "There is no AI company in the enterprise better positioned for sustainable profitable revenue growth than ServiceNow," CEO Bill McDermott said on the earnings call.

The selloff has created a stark dividing line for investors. On one side are those who see structural decay, believing the software sector's business model is fundamentally broken by AI. On the other are those who, like Dodge & Cox, see "significant valuation dislocations" as the market struggles to identify AI's true winners and losers. For now, the trajectory of AI monetization within incumbent platforms like Now Assist remains the key battleground. Sustained acceleration would validate the integration thesis, while any slowdown would confirm the market's deepest fears.

This article is for informational purposes only and does not constitute investment advice.