ServiceNow and Adobe trade at steep discounts despite double-digit growth

ServiceNow (NOW) and Adobe (ADBE) remain among the worst performers in the S&P 500 for 2026, trading significantly below their historical highs as investors weigh the impact of artificial intelligence on enterprise software valuations.

ServiceNow shares have fallen approximately 40% from their January 2025 record, while Adobe stock is down about 65% from its November 2021 peak. Despite these declines, both companies continue to report double-digit revenue growth, suggesting that market sentiment may be outpacing fundamental performance.

ServiceNow's subscription revenue has expanded for three consecutive quarters, with year-over-year growth reaching 24.5% in the second quarter of 2026. This figure includes roughly 1.25 percentage points of contribution from Armis, a cybersecurity firm acquired in April, and revenue pulled forward from U.S. federal customers. Management expects subscription growth to slow to 20.5% in the third quarter. The company's non-GAAP operating margin improved to 31% in the most recent fiscal year, up from 29.5% in 2024, with guidance targeting 31.5% this year. ServiceNow also allocated approximately $2.2 billion to share buybacks in the first quarter, following a $5 billion increase to its repurchase authorization in January.

The valuation compression for ServiceNow appears driven largely by the multiple paid at its peak rather than operational deterioration. At its January 2025 high, the stock traded at a premium multiple of adjusted earnings per share for 2024. Although adjusted earnings per share have since risen by about 35%, shares now trade at approximately 37 times that figure. The stock also experienced an 18% single-day drop in April after management cited Middle East conflicts delaying major deals.

Adobe's decline is more closely tied to AI-related concerns, with shares falling over 21% in 2025 and dropping another 31% in early 2026. However, financial results show resilience. Subscription revenue grew 14% year-over-year in the fiscal third quarter ended August 28, matching the previous quarter's pace. Annualized recurring revenue from AI-first products surged more than 150%, while operating cash flow hit a record $2.52 billion, up about 15%. Adjusted earnings per share increased 15% to $6.13, aided by a lower share count.

Signs of moderation are emerging in Adobe's growth metrics. Total annualized recurring revenue rose 11.2% in the fiscal third quarter, and management targets full-year growth of 10.2%. Adjusted operating margins dipped to 44% from approximately 46% a year earlier. At current prices, Adobe trades at about 10 times its fiscal 2026 adjusted earnings target and under nine times expected fiscal 2027 earnings, implying significant expectations for future deceleration.

For ServiceNow, current remaining performance obligations, representing contract revenue expected in the next 12 months, grew 21% in the second quarter, with management projecting 19.5% growth in the third quarter. The stock currently trades at approximately 28 times expected 2027 earnings.