Trump's new AI budget just passed — one stock could soar (From Behind the Markets)
What You Need to Know
- ServiceNow looks set up for a 2026 rebound and may just need one clear catalyst to bring retail buyers back.
- Institutions are buying into the pullback in early 2026, treating it as a value-driven entry point.
- Cash flow and growth execution support the outlook, with recent equity gains reinforcing the longer-term case.
Valuation concerns capped ServiceNow (NYSE: NOW) price action in 2025, setting up a correction and buying opportunity unfolding in 2026. The Q4 release not only affirmed the company’s strengths but also its longer-term outlook and deepening value. Trading at approximately 30x earnings today, the stock is approximately 15x the 2030 outlook, suggesting a solid double-digit to triple-digit price advance lies ahead.
Institutional activity is another factor highlighting the early 2026 opportunity. The group sold on balance in Q4 2025, harvesting losses for tax purposes, but bought on balance for the year and accelerated activity in early 2026. Buying in January topped $6 billion, or approximately 4% of the market cap, and will likely remain solid due to the value opportunity.
Highlights from the Q4 release include a $5 billion increase to the buyback authorization. The buybacks are focused on offsetting dilution and are a significant factor for investors. While this company does not buy shares aggressively or pay dividends, it is aggressively investing in its growth and produced an attractive 35% equity gain for investors in 2025. The year-end balance sheet highlights reveal the company is well-positioned to continue executing its strategy, while the 2026 outlook suggests another double-digit equity gain is ahead.
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Generative AI Drives Q4 Strength for ServiceNow
ServiceNow had a solid quarter with revenue growing by more than 20% to over $3.5 billion. The strength was driven by subscriptions, up 21% year-over-year, underpinned by agentic and generative AI tools and client growth. The Now Assist generative AI tool is a growth pillar, up more than 100% compared to the prior year, while net new contract volume in contracts over $1 million increased by 40%.
Margin news is also favorable despite the market response. The company delivered margin strength, underpinned by revenue leverage and operational quality, leaving adjusted earnings ahead of expectations. The 92 cents is 3 cents ahead of the consensus tracked by MarketBeat, compounded by a robust 2026 outlook. Guidance forecasts revenue to slow to the low-20% to high-teens, well above the consensus forecast, and is likely cautious given the increase in remaining performance obligations (RPO). Current RPO (cRPO) increased by 25%, and RPO by 26.5%, suggesting acceleration is possible in 2026.
ServiceNow Stock Overextends, Diverges From Indicators
ServiceNow’s stock price plunged more than 10% following the Q4 release and guidance update and may continue to fall in 2026. However, the charts indicated significant divergences in stochastic and MACD, suggesting overextension, shifting market dynamics, and a potential for a robust rebound. In this scenario, ServiceNow’s stock price may find a bottom in early 2026 and then set up to rebound later in the year.
The December stock split is also impacting markets today. The stock split provided an opportunity for investors to sell, a not uncommon event, adding downward pressure to the price action. The critical takeaway is that this company issued a stock split, and those that do tend to trend higher over the long term. That is because companies that split do so because their stock prices have gotten too high; the stock price increases are underpinned by strong business, cash flow, and, usually, capital returns, and those conditions remain in effect following the split. The probable result is that the current selling pressures on ServiceNow stock will soon shift toward a more accumulation-focused market.
The catalyst for the rebound will likely come in an upcoming quarterly report. Sustained strength can put analysts in a more bullish posture and bring the retail market back to buying. As it stands, the analysts are lowering their price targets for this Moderate Buy-rated stock and indicate a move to the low end of the range, where the stock is currently trading, with low-end targets providing a floor near critical support.
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