ServiceNow (NOW) on paper should rank among the most relevant publicly traded companies. As a cloud-computing specialist focused on workflow automation, it translates the transformative potential of artificial intelligence into usable, practical applications for enterprise clients. Unfortunately, NOW stock just hasn’t gotten the memo.
Claim 70% Off TipRanks Premium
- Unlock hedge fund-level data and powerful investing tools for smarter, sharper decisions
- Stay ahead of the market with the latest news and analysis and maximize your portfolio's potential
Since the start of the year, ServiceNow has already been working on the back foot, with its equity down more than 12%. Over the past six months, NOW stock has declined by nearly 30%. What’s worse, there seems to be little evidence that would support the idea of an imminent turnaround.
Sure, it’s easy to wax lyrical about AI and the paradigm shift that machine learning can spark. However, investors seem particularly concerned about ServiceNow’s execution risks. While the company’s expansionary strategy should, in theory, bolster the corporate canvas—including a ramp-up of its cybersecurity offerings—management faces credibility concerns regarding sustainable organic revenue growth.
Despite the poor performance of NOW stock, it’s worth noting that the broader societal narrative is increasingly AI-focused. Of course, there will always be concerns about the rising capital expenditures in this space and whether the returns will be adequate. Still, no one is backing off from AI, which puts ServiceNow into the driver’s seat long-term. Even better, a turnaround could also be in the works — and that will be of great interest for options traders.
Value is in the Eye of the Beholder
Given the sharp volatility of NOW stock, multiple experts have argued that the software giant is undervalued. It’s not difficult to understand the argument. Currently, shares trade at approximately 34x forward earnings. At the halfway point last year, this metric stood at over 62x.
However, in reality, there’s no such thing as a security that is independently verifiable as undervalued. Such descriptors are only relative to an assumption, and no one knows whether that assumption is true.
Further, options calculators that purport to provide “probability of profit” figures are also only relevant to the assumptions baked into the underlying Black-Scholes formula, which is Wall Street’s standard mechanism for pricing derivatives. In other words, anytime a calculator spits out a probability, you can rest assured it’s not the “true” probability. Rather, it’s the odds assuming that the framework is completely accurate. Here’s a newsflash: it’s not.
While Black-Scholes-derived formulas are useful because they provide a standard mechanism for pricing options, they represent a one-size-fits-all approach to every optionable security. Therefore, a software company will be priced using the same mathematical methodology as a copper miner.
You can see the problem. The Black-Scholes model will never accurately assess any single security because of its universal applicability. So, it’s not about asking whether the formula is “wrong” because we know that it can never be consistently accurate. Rather, it’s about asking how wrong the formula is — and whether we can arbitrage the gap in the size of the error.
To identify such arbitrage opportunities, we must analyze the demand structure of NOW stock, which can only be achieved through a hierarchical analysis.
Analyzing the Risk Topography of NOW Stock
While it may be difficult to appreciate, under normal circumstances, NOW stock enjoys an upward bias. Using data since January 2019, a random long position held for a 10-week period should ordinarily land between $130 and $150 (assuming a spot price of $134.61, Wednesday’s close). With probability density likely to peak at around $138 across multiple 10-week trials, ServiceNow would ordinarily make for a solid buy-the-dip candidate.
What makes this notion even more compelling is the current quantitative signal. Over the past 10 weeks, NOW stock has recorded only two up weeks, resulting in a downward trend. This 2-8-D sequence would ordinarily be considered highly risky for bullish investors, as it demonstrates that bears effectively have full control.
However, when this sequence flashes, the typical response is a reflexive move higher. Over the next 10 weeks, the forward distribution should place NOW stock between $125 and $163, with probability density likely to peak at around $147.50. That’s almost a $10 difference compared to the aggregate peak, which represents a form of structural arbitrage.
Looking at risk topography — which provides a three-dimensional view of demand structure — trial outcomes are crowded between $145 and $150. With probability density peaking within this range, we have a natural price target to aim for. Essentially, we can buy an options strategy that zeroes in on where NOW stock should cluster following the flashing of the 2-8-D sequence.
With this market intelligence, I’m really liking the 144/150 bull call spread expiring March 20, 2026. This spread will give extra time for NOW stock to rise above the $150 strike at expiration. If it does, the maximum payout for this transaction would come in at nearly 173%. Breakeven lands at $146.20, adding to the trade’s probabilistic credibility.
Of course, this hierarchical approach isn’t the only way to price risk. Under the Black-Scholes model, the probability that NOW stock will reach $150 by the March 20 expiration date is only 25.33%. While that’s very low, the pessimism stems from the fact that Black-Scholes measures risk as a function of distance to the spot.
I have calculated the probability density as a function of state, which is why I have greater confidence in the $150 target.
Is ServiceNow a Good Stock to Buy?
Turning to Wall Street, NOW stock has a Strong Buy consensus rating based on 30 Buys, two Holds, and zero Sell ratings. The average NOW price target is $221.81, implying 68% upside potential in 2026.
An Unexpected Bounce Back Could Be in the Works
While ServiceNow may be a relevant enterprise due to its automation services, NOW stock has not yet caught up to the narrative, in part due to execution risks. However, given the significant downside embedded in the security, historical data suggest that a turnaround may be on the horizon. Thus, by using a risk model that captures this tendency, a bull spread targeting the $150 strike price could be enticing.