Why Is ServiceNow (NOW) Down 12% Since Last Earnings Report?

ServiceNow (NOW) shares have declined approximately 12% since its Q2 2025 earnings report, underperforming the S&P 500, despite the company reporting robust financial results including adjusted EPS of $4.09 (up 30.7% Y/Y, beating estimates by 15.54%) and revenues of $3.22 billion (up 22.4% Y/Y, beating estimates by 3.02%). This strong performance was underpinned by 22.5% subscription revenue growth, expanded non-GAAP operating margins, and significant AI innovation with new product launches and strategic partnerships, while the company also issued positive Q3 and FY25 subscription revenue growth guidance around 20%.

Analysis

Despite ServiceNow reporting strong second-quarter 2025 results that beat consensus estimates, its shares have declined 12% over the past month, significantly underperforming the S&P 500. The company delivered robust top-line growth, with revenues increasing 22.4% year-over-year to $3.22 billion, driven by a 22.5% rise in subscription revenues. Forward-looking metrics were also solid, with current Remaining Performance Obligations (cRPO) up 21.5% to $10.65 billion. Furthermore, non-GAAP operating margin expanded by 230 basis points to 29.7%, and the company is executing an aggressive AI strategy with new products and partnerships with AWS and NVIDIA. However, the market's negative sentiment may be fueled by several underlying concerns. Non-GAAP gross margin contracted by 160 basis points, and quarterly free cash flow fell sharply to $535 million from $1.48 billion in the prior quarter. Additionally, the company's guidance for Q3 projects cRPO growth of 18.5%, a notable deceleration from the 21.5% reported in Q2. This combination of margin pressure, a sharp FCF drop, and slowing growth in a key forward-looking metric likely overshadowed the headline earnings beat, especially for a stock with a high valuation, as indicated by its 'F' grade for value.

Key Decisions for Investors

• Investors should closely monitor the guided 18.5% cRPO growth in the next earnings release, as any further deceleration could signal a more sustained slowdown and apply further pressure to the stock.
• The 12% share price decline could present an entry point for those confident in the long-term AI growth narrative, but caution is warranted given the recent gross margin contraction and the significant sequential drop in free cash flow.
• Given the stock's high valuation and recent underperformance, investors should assess if the full-year guidance, including 20% subscription revenue growth and a 32% free cash flow margin, is sufficient to justify the risk of slowing momentum.
• Consider the disconnect between the strong fundamental performance, including a 30.7% year-over-year increase in adjusted EPS, and the negative market reaction, which may indicate that the stock was priced for perfection with no tolerance for slowing growth metrics.