MS upgrades ServiceNow on growth resilience despite AI and federal risks

Investing.com -- Morgan Stanley raised its rating on ServiceNow to Overweight from Equal-weight, saying investor concerns about artificial intelligence disruption and U.S. federal spending cuts have overshadowed the company’s steady execution and ability to expand in workflow automation.

The brokerage set a price target of $1250, up from $1040, which gives it a premium to large-cap software peers.

ServiceNow can sustain about 20% subscription revenue growth and more than 20% free cash flow growth through 2027, according to brokerage.

“Investors appear to be missing the forest for the trees,” Morgan Stanley analysts said. The company’s high-90% renewal rates and a customer base include more than 85% of the Fortune 500.

There has been concerns over potential risks from generative AI, such as pressure on seat-based pricing models and competition from startups, as well as weakness in federal contracts.

But analysts said these are outweighed by ServiceNow’s strong positioning as enterprises prepare for wider adoption of AI-enabled “agentic computing” starting in 2026.

Morgan Stanley cited early interest in ServiceNow’s Workflow Data Fabric, which integrates disparate data sources across IT, HR, finance, security and sales. Brokerage noted “very positive conversations” around the product, while another said enhancements had been “pretty well received.”

The firm also flagged AI-related efficiency gains, with ServiceNow’s own internal usage already contributing $315 million in value and expected cost savings of $100 million in 2025.

“As you think about the future, that (AI-related cost savings) will continue to grow. And so, the ability to see more leverage in the model is clear,” management said.

Shares of ServiceNow are down about 12% year to date, compared with a 9% gain for large-cap software peers, reflecting concerns over federal demand and AI-related disruption.

Morgan Stanley said these pressures have created “a unique opportunity” for investors.