Bank of America spots ServiceNow’s overlooked AI advantage

Bank of America reiterated its Buy rating and $130 price target on ServiceNow (NOW) after the software company reported stronger-than-expected second-quarter contract growth. The target represents about a 36% upside from the $95.46 share price listed in BofA's July 23 report.

According to the report, ServiceNow's subscription revenue rose 24.5% to $3.88 billion, and current remaining performance obligations (contracted revenue expected within the next 12 months) increased 21% to $13.2 billion. Both measures exceeded Wall Street expectations.

BofA highlighted a less obvious point in the report: ServiceNow's AI agents may benefit from the workflow history and infrastructure records already stored on its platform.

Analyst Tal Liani said ServiceNow can draw on that context when an agent encounters an enterprise problem that does not have a simple, documented solution.

Because ServiceNow already stores those records, its agents could handle difficult cases with fewer data-integration steps than an outside AI product, according to the report.

A basic service-desk agent can reset a password, classify a support ticket, or approve software access by following a documented process.

An application outage presents a more complicated task. Before taking action, an agent may need to identify which servers support the application, review recent configuration changes, check which other services depend on it, and confirm who has authority to approve a repair.

The product debate is shifting from simple L1 automation ... to broader agentic workflows.

ServiceNow can provide that background through customers' workflow histories, its Configuration Management Database (CMDB) and newer knowledge tools.

The CMDB records applications, servers, services, and the relationships among them. ServiceNow's Context Engine adds information about people, roles, company policies, and prior decisions. Those records can help an agent determine which systems could be affected before it changes a configuration or restarts a service.

A customer deploying a third-party AI tool may need to extract records from several systems, explain how those records relate to one another, and return the agent's output to the software where employees complete the work.

ServiceNow can give an agent access to existing workflows, system relationships, permissions, and approval rules on the same platform. BofA said the setup could reduce deployment costs and complexity while allowing the agent to complete a larger portion of the process.

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The approach could become more useful as companies move beyond repetitive support requests. Poorly documented incidents, unusual security events, and work spanning several departments require agents to interpret company-specific information before choosing an action.

BofA views ServiceNow's position inside those workflows as its key strategic advantage over third-party AI tools. But the firm also cautioned that the advantage still depends on pricing, the quality of agents' results, and customers' willingness to expand their usage.

ServiceNow's second-quarter results provide early commercial evidence for BofA's argument.

The company's AI products surpassed $1 billion in annual contract value during the quarter. The number of customers running ServiceNow's agentic AI in production increased ninefold over the past nine months.

ServiceNow is also charging more when customers upgrade to packages containing its newest AI products.

CFO Gina Mastantuono said that pricing increases for the company's established Pro Plus packages remained above 30%. Upgrades to recently introduced AI-native packages produced increases of 20% to 30%, in line with the range ServiceNow had previously outlined.

Related: Bank of America resets ServiceNow stock price target sharply

Security is one example of how ServiceNow can combine enterprise information with an automated response. ServiceNow's security and risk products appeared in 16 of its 20 largest second-quarter deals, and the company completed 24 security deals worth more than $1 million each, according to BofA.

Products added through Armis and Veza provide information about devices, vulnerabilities, and user identities. ServiceNow can connect those records to workflows that assign a problem, route an approval, and document the steps taken to resolve it.

BofA said traction from AI Control Tower, Armis and Veza helped drive the quarter's security results.

More than $1 billion: AI annual contract value

Ninefold: Increase in customers running agentic AI in production over nine months

20% to 30%: Pricing increase from upgrades to AI-native packages

24: Security deals worth more than $1 million each

BofA's argument depends on three unresolved questions: whether ServiceNow's agents consistently produce reliable results, whether customers expand their usage, and whether the company can charge enough to cover the costs of running AI workloads.

ServiceNow's second-quarter gross margin fell to 77.9%, down from 81% a year earlier, and came in below BofA's 79.3% estimate. The firm reduced its fiscal 2026 gross-margin estimate by 45 basis points to 78.9%.

A lower gross margin means a larger portion of ServiceNow's revenue is being consumed by the cost of delivering its products. BofA expects AI adoption and increased use of hyperscaler infrastructure to remain near-term expenses. The integration of recent acquisitions adds further costs.

The company offset some of that pressure elsewhere in the income statement. Its adjusted operating margin reached 29.5%, about 270 basis points above Wall Street expectations, helped by stronger subscription revenue and the timing of spending.

Management maintained its full-year operating-margin forecast of 31.5%, however, as AI usage and acquisition integration continue to weigh on expenses.

The quarter's subscription-revenue outperformance also received help from U.S. federal customers. Strong demand shifted some on-premise revenue recognition from the third quarter into the second.

ServiceNow forecast third-quarter subscription revenue of $3.975 billion to $3.980 billion, slightly below the roughly $4 billion that analysts expected. The pull-forward means investors cannot attribute the entire second-quarter beat to AI demand.

ServiceNow has shown that customers will deploy its AI products and pay more for upgraded packages. Sustaining BofA's bullish view now requires those agents to resolve complex cases accurately and cheaply enough to expand usage without pushing gross margins lower.

Related: ServiceNow gets bearish call before major earnings test

This story was originally published by TheStreet on Jul 24, 2026, where it first appeared in the Investing section. Add TheStreet as a Preferred Source by clicking here.