According to a report, Morgan Stanley released an in-depth third-quarter research report on ServiceNow (NOW.US) on October 29, 2026, with the core tension being that the company's AI commercialization data is impressive, but the AI dividend has not yet translated into an acceleration in overall business growth.
The institution maintained its Overweight rating but lowered its price target from $180 to $160. During the reporting period, the company's closing price was $150.13 and its market capitalization was $155.586 billion. It judged that the stock price may fluctuate within a range in the short term, and that core indicator cRPO needs to return to acceleration before there is room for valuation upside.
Looking at third-quarter operating data, the company's constant-currency cRPO grew 21% year over year, slightly exceeding company guidance, but the growth rate continued to decline. Organic cRPO excluding acquisitions rose only 18% year over year, below 19% in the second quarter. Fourth-quarter guidance weakened further, with constant-currency cRPO growth guidance of 18.5%, significantly below the market consensus of 20%.
Part of the growth pressure comes from business fundamentals, and it is also disturbed by statistical rules and the company's strategic investments. Contracts with termination for convenience (T4C) clauses are not included in cRPO but still recognize subscription revenue, which will create a 50bp drag on the metric in 2027. The company is increasing investment in field delivery engineers (FDE), and part of revenue is shifting from subscription business to professional services, which will create 50-100bp of growth pressure on subscription revenue from the fourth quarter of 2026 to 2027.
The AI business was the biggest highlight of the quarter, with management raising its AI annual contract value (ACV) target for the second time this year to $1.7 billion. Third-quarter AI net new ACV rose 65% year over year, usage of intelligent agent AI in production environments increased 13 times year over year, and million-dollar-plus AI deals achieved 4.5-fold growth. Multiple new product lines are growing rapidly, with six businesses already achieving more than $1 billion in ACV. Internal application of AI also generated more than $1 billion in annualized benefits.
On the profitability side, the company raised its fiscal 2026 free cash flow margin target to 36% and expects margins to continue expanding in 2027, but fourth-quarter operating margin guidance was below market expectations, and non-GAAP EPS slightly missed expectations.
Morgan Stanley constructed a multi-scenario valuation framework in the report, using a 11.9% WACC for DCF discounting. The base case price target is $160. In the optimistic scenario, if new markets break out, the price target is $200. In the pessimistic scenario, if new product expansion falls short of expectations, the stock price could drop to $75.
The focus of the bull-bear debate centers on the return on FDE investment. Bulls believe delivery services can help customers realize business value faster, drive AI penetration, and prompt cRPO and subscription revenue to reaccelerate. The bear risk is that customers now impose clear ROI requirements on AI projects, which will lengthen sales cycles, and the input-output return of FDE investment remains uncertain.
Morgan Stanley lowered its 2027-2028 revenue and EPS forecasts, cutting its 2027 subscription revenue growth expectation from 19.8% to 18.0%. The institution remains optimistic about the company's competitive barriers and product matrix advantages in the enterprise workflow track over the long term, but clearly stated that before cRPO growth shows substantive improvement, the stock will be in a "valuation penalty period" and lack clear upside catalysts.
The report also flagged downside risks such as intensifying competition and the seat-based pricing model being impacted by generative AI, and advised investors to continuously track three core variables: cRPO growth, the transmission of AI to revenue, and the return on FDE project implementation.
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