Federal AI contracts drive ServiceNow and Salesforce rebound
A wave of federal artificial intelligence contracts is sparking a sharp rebound in battered enterprise software stocks, signaling a shift from infrastructure spending to recurring revenue.
ServiceNow climbed 6% to $97.36 and Salesforce gained 4% to $162.56 on Friday as fresh government contracts provided a catalyst for an oversold sector. The rally follows a brutal year for both companies, with ServiceNow down 40% and Salesforce shedding 40.5% year to date.
The moves reflect a broader market rotation away from AI infrastructure hardware and toward application-layer software. Investors are looking for evidence that massive capital expenditure on artificial intelligence is finally translating into tangible, recurring software revenue. A separate $7 billion Pentagon contract awarded to Oracle underscores the scale of this federal spending wave.
ServiceNow’s advance was anchored by its second-quarter results, released Wednesday. The company reported subscription revenue of $3.88 billion, up 24.5% year over year, while current remaining performance obligations reached $13.2 billion. Its annual contract value for AI surpassed $1 billion ahead of schedule, and agentic-AI production customers surged ninefold in nine months.
"ServiceNow's exceptional Q2 results solidify our position as the fastest-growing major enterprise software and cybersecurity company," CEO Bill McDermott stated. Management raised its full-year subscription revenue guidance to at least $15.755 billion. Security products, bolstered by acquisitions like Armis and Veza, featured in 16 of the 20 largest deals.
Salesforce gained ground on its own government contract, securing a $1.6 billion deal with the Department of Veterans Affairs for its Agentforce platform. This validates the enterprise software sector's ability to monetize complex AI agents within massive federal bureaucracies.
Despite the optimism, analysts remain divided on the sustainability of the recovery. UBS cut its ServiceNow rating to Neutral with a $110 price target, warning that "demand remains mixed." The bank noted that second-quarter results benefited from federal on-premise revenue pulled forward from the third quarter.
Furthermore, ServiceNow's third-quarter subscription guidance of $3.975 billion to $3.98 billion fell short of the $4 billion consensus estimate. Gross margins also contracted to 77.9% from 81%, a potential red flag for investors. Still, other Wall Street firms maintained bullish stances, with Bernstein raising its target to $248 and Bank of America highlighting an "overlooked AI advantage."
