Why ServiceNow Plunged Today

Shares of back office software-as-a-service company ServiceNow (NYSE: NOW) plunged on Monday, falling 11.9% as of 1:18 p.m. EDT.

ServiceNow had two rather significant pieces of news today: One, it was reported ServiceNow is in talks to make what appears to be an expensive acquisition. Two, an analyst downgraded shares, predicting that fears over the potential disruption from generative artificial intelligence would cap ServiceNow's valuation multiple in 2026.

ServiceNow circles a cyber acquisition as GenAI disruption looms

On Monday, Bloomberg News reported that ServiceNow is in advanced talks to acquire Armis, a private U.S.-Israeli cybersecurity company that protects internet-connected devices from advanced threats. Bloomberg reported the company could be valued at roughly $7 billion.

Armis is still private, so detailed financial information is scarce. However, Armis revealed it had surpassed $300 million in annualized recurring revenue (ARR) back in August. Therefore, a $7 billion valuation would equate to roughly 23 times annualized sales. Even for a software company, that's in the more expensive range today.

Additionally, ServiceNow also received a downgrade from a Wall Street analyst today. Keybanc analyst Jackson Ader lowered his rating on ServiceNow to "Underweight," which is especially bearish for an analyst to do, while giving a new price target of $775.

Notably, most analysts assign either an Overweight or Equal Weight rating to stocks. And while ServiceNow's stock price has already fallen to $761 today, analyst price targets typically serve as a forecast for the stock price one to two years out.

Ader thinks generative AI is going to lead to "seat count pressure" at major companies – essentially, AI will increase productivity and therefore lower the number of subscriptions companies will need to buy. While ServiceNow offers "hybrid" pricing -- or higher prices for its AI-infused software -- Ader wrote, "this has not kept other SaaS sub-sectors afloat when this narrative has come for them."

Image source: Getty Images.

Software continues to be volatile as AI looms

Generative AI raises the prospect of disruption within the software sector, as many long-term winners may face challenges along the lines that Ader describes in his note. On the other hand, software companies that can harness the power of AI and turn it into tangible business outcomes could become significant winners.

The main problem is that software stocks generally traded at high valuations on the eve of this new GenAI era. Therefore, investors in the space will need to closely monitor their holdings for signs of disruption, as well as opportunity.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ServiceNow. The Motley Fool has a disclosure policy.