As semiconductors suffer heavy losses, tech bulls set their sights on AI applications! ServiceNow (NOW.US) shares surge against the trend, as Morgan Stanley focuses on "agentic consumption + workflow upgrades"

Title context: As semiconductors suffer heavy losses, tech bulls set their sights on AI applications! ServiceNow (NOW.US) shares surge against the trend, as Morgan Stanley focuses on "agentic consumption + workflow upgrades" Text: As semiconductors suffered a heavy selloff, the strong counter-trend performance of software company ServiceNow Inc. (NOW.US), which focuses on optimizing digital workflows, highlights that the stock market is reassessing the strong profit opportunities on the AI application side. From October 19 to 23, the company's share price rose for five consecutive days, with a cumulative gain of 11.97% during that period, while the Philadelphia Semiconductor Index fell 3.21% over the same period; on October 22, the Philadelphia Semiconductor Index plunged 6.72% and the Nasdaq Composite fell 2.60%, yet ServiceNow rose 2.53%. As of October 26, its closing price was US$158.18, down 0.49% that day. Therefore, this strong run mainly reflected significant excess alpha returns in the week before its earnings release, and also highlighted that the market is bullish on the company's performance entering an accelerated growth trajectory against the backdrop of the massive wave of AI agent applications, while its share price is also expected to break away from its sluggish trend of recent years amid AI-driven fundamental expansion. Morgan Stanley's October 26 earnings preview research report on ServiceNow shows that the institution's core bullish judgment is that solid demand for core workflows, the gradual ramp-up of AI products and consumption-based charging, and improved federal government procurement are jointly creating conditions for a reacceleration of growth; however, the share price had already risen more than 70% over the prior three months, and further upside requires more solid operating results and positive forward outlook to exceed expectations. The Morgan Stanley analyst team maintained its "Overweight" ratingits most bullish ratingand US$180 price target on ServiceNow, implying 13.2% upside relative to the US$158.96 share price used in the report, or 13.8% based on the October 26 closing price. Morgan Stanley's research report leans toward the company exceeding expectations on third-quarter order metrics and a modest upward revision to next-twelve-month earnings forecasts, but the key to the bullish trading theme is whether organic growth improves after excluding acquisition contributions, and whether quarterly outperformance can drive an upward revision to full-year guidance. The stock has already run up 70%; earnings need to clear the "organic growth reacceleration" threshold As of the October 23 market data used in the report, ServiceNow's share price had risen more than 70% over the past three months, but Morgan Stanley's third-quarter base-case growth forecasts were not aggressive: subscription revenue of about US$3.978 billion, total revenue of US$4.092 billion, and adjusted earnings per share of US$1.02, all close to market consensus. What really determines the expectation gap is current remaining performance obligations (cRPO, i.e., contracted revenue expected to be recognized over the next twelve months)both market consensus and company guidance point to growth of about 20% on a constant-currency basis, but after deducting contributions of about 1.5 percentage points from Armis, about 1.1 percentage points from Moveworks, and about 0.4 percentage points from Veza/Pyramid, organic growth is cut to about 17%. The institution judges that investors are actually collectively expecting ServiceNow's constant-currency cRPO growth of about 22%, 2 percentage points above guidance, and reflecting a modest acceleration in organic growth; at the same time, the company should factor part of the excess growth into its full-year subscription revenue guidance. Over the past eight quarters, subscription revenue has beaten consensus by an average of about 1%, which also means that an ordinary magnitude of beat may not be enough to continue lifting valuation. Morgan Stanley-led channel checks and feedback support this expectation: demand for IT operations management, IT asset management, security operations, as well as customer service, human resources, and field service was broadly solid; partner performance was roughly in line with or slightly above expectations, with no obvious weakening in the large-deal pipeline; federal government business improved versus 2025, government procurement data showed multiple contracts in the million-to-ten-million-dollar range, and the public sector overall accounts for about 10% of company revenue. On AI application products, one partner said that more than 25% of its own customer base had deployed AI Control Tower, indicating that governance demand is beginning to enter actual purchasing. Morgan Stanley said that the crucial next step for the company's (ServiceNow's) AI commercialization is for customers to shift from buying AI features to continuous consumption and additional purchases of usage quotas such as Assist Packs. However, customers are still scrutinizing the hybrid charging model and token cost transparency; in addition, the company previously disclosed that some federal on-premises revenue was recognized earlier, shifted from the third quarter to the second quarter, so this quarter's revenue cadence needs to be judged in conjunction with contract growth. Behind the US$180 price target: the strong AI application premium must ultimately be cashed out through stronger cash flow Morgan Stanley's model forecasts subscription revenue of US$15.770 billion, US$18.887 billion, and US$22.479 billion in 20262028, respectively; adjusted operating margin rising from 31.5% to 32.5% and 33.5%, and adjusted earnings per share rising from US$4.09 to US$5.06 and US$6.05. Adjusted free cash flow is expected to be about US$5.666 billion in 2026, a 35% margin, rising further to about US$6.875 billion in 2027. The "reacceleration" process referred to in Morgan Stanley's research report mainly means significant improvement in recent organic orders and AI product line consumption metrics, and does not mean that future annual growth rates will continue to risesubscription revenue growth in the model still gradually declines from 22.4% in 2026 to 19.8% in 2027 and 19.0% in 2028. Morgan Stanley said the core mechanism supporting ServiceNow's continued revenue and free cash flow growth is: a high renewal rate solidifies the revenue base, selling more workflows, AI features, and governance products to existing customers further substantially increases customer contract value; as revenue grows faster than expenses, operating leverage is gradually released, driving margin expansion. At the valuation framework level, the US$180 price target Morgan Stanley assigns uses a 2030 free cash flow forecast of about US$11.8 billion, a 21x terminal multiple, discounted at an 11.9% weighted average cost of capital, and includes net cash. The bull-case target is US$220, corresponding to faster expansion of non-core workflows and AI products; under the bear case, the target is only US$75, reflecting new market expansion falling short of consensus and a significant compression in valuation multiples. Relative to US$158.18, these imply about 39.1% upside and 52.6% downside, respectively. The huge difference between the bull and bear price targets shown by the model calculations indicates that the market is pricing not just how much money can be made next quarter, but whether ServiceNow can long maintain the entry point for enterprise workflows and agent orchestration. Competition in the new generation of enterprise digital operations products centered on AI agents, sales execution, AI replacing some human seats, and post-acquisition integration and cash recovery will all affect this long-term premium; the 35% free cash flow margin in the report is an adjusted metric and is not equivalent to all distributable cash after deducting acquisition spending. From enterprise workflows to agent governance, why are Wall Street analysts successively raising ServiceNow price targets? ServiceNow's main business is enterprise workflow software, based on IT service management and extending to asset, operations, customer service, employee service, and security risk management, with subscription revenue accounting for about 97% of total revenue. Its AI advantage comes from connecting large models to real business: Now Assist provides generation and assistance capabilities, Otto combines capabilities such as Moveworks to understand requirements, retrieve enterprise knowledge, and assign tasks, agent orchestration connects cross-system operations, and AI Control Tower handles permissions, governance, and auditing. AI large models/AI agents can propose solutions, but for enterprises to pay to implement them, they still need the reliable data context, approval chains, and execution controls that ServiceNow has long possessed. In the second quarter, the company's AI annual contract value exceeded US$1 billion, with AI agent application deployments growing ninefold in nine months. On October 21, the company also announced the general availability of Arc, a long-running agent developed in partnership with "AI chip leader" NVIDIA Corporation, and advanced AI Passport and runtime- and hardware-level permission enforcement; Arc is included in existing packages rather than priced separately, and its commercial value is more likely to be realized through customer adoption, package upgrades, and subsequent consumption growth. Other Wall Street Financial Institutions, Inc. senior analysts' recent bullish reasons also focus on this conversion process: BofA maintained "Buy" on October 23 and raised its price target from US$150 to US$180, focusing on expanded AI adoption and incremental spending; Citi maintained "Buy" with a US$170 target, bullish on new AI products and improved federal business channels; Piper Sandler maintained "Overweight" with a US$175 target, emphasizing fourth-quarter organic growth and increased CKH HOLDINGS consumption; relative to US$158.18, the three imply about 13.8%, 7.5%, and 10.6% upside, respectively. Cantor Fitzgerald raised its "Overweight" price target to US$201 on October 26, implying 27.1% upside; Bernstein maintained "Outperform" with a US$266 target, implying 68.2% upside, with its more optimistic judgment based on renewing customers adopting new-version packages and effective price increases driving growth. Target prices still vary widely across firms, but the common focus is already clear: whether demand for the AI application software product line led by AI agents can continue to strong paid usage scale, contract scale expansion, and stronger free cash flow.