ServiceNow, Armis Tie-Up Could Be a Good Thing

We’ve made our move with Welltower (WELL) shares, and now let’s turn our attention to ServiceNow (NOW) shares, which are under some pressure following two developments. One is a downgrade on the part of KeyBanc, and speculation that the company could pony up to acquire cybersecurity firm Armis for around $7 billion.

Let’s break these down, starting with KeyBanc.

The firm’s downgrade for NOW shares stems from the following thought process and includes a price target of $775 on the share:

"…ServiceNow's position and perception as an AI orchestration winner may cede ground to Microsoft in 2026. Also, while the government headwinds have not been as bad as feared a year ago, the scrutiny of spend in that arena is probably far from over."

To us, this continues the herd-think that only one company in a category can benefit from the ongoing adoption and usage of AI in the enterprise. As we discussed last week, multiple data points show that it continues to rise with companies looking to drive productivity. That meshes with ServiceNow’s focus on IT, employee and customer workflows.

Nothing shows that more than reports that consulting firm McKinsey & Co. is contemplating layoffs as it scales AI. What becomes important now is the part where AI-related software and services for the likes of ServiceNow and others are the premium pricing attached to them. As far as KeyBanc’s comment about government spending, while it’s true that spending scrutiny likely isn’t over, let’s remember we are seeing adoption there as well.

While some will point to that downgrade, we would argue the greater factor in weighing on NOW shares today is the speculated acquisition of Israeli cybersecurity company Armis. Founded in 2016, Armis focuses on real-time security monitoring for internet-connected devices and counts more than 40% of Fortune 100 companies among its customers. Notable customer segments include healthcare, financial services and defense.

If completed at the reported $7 billion price, this acquisition would represent ServiceNow’s largest M&A transaction to date, but it would also significantly expand its footprint in the security sector. While the price tag could be a tad high, subject to potential synergies and related items, we would be interested to learn how ServiceNow would integrate Armis and cross-sell against their respective customer lists. And with that in mind, how Armis helps ServiceNow gain access to the roughly 15% or so of the Fortune 500 it has yet to crack in a meaningful way. We would also look to see how buying Armis fits into ServiceNow’s larger security plans following the recently announced $1 billion acquisition of AI-native identity security platform Veza.

Our Thoughts

As you likely saw above, we disagree with the thought process at KeyBanc, and in concept, we like ServiceNow’s potential acquisition of Armis.

Would we like it a bit more if the price tag were less? Probably, but with the growing importance of security in the cloud, should ServiceNow go ahead and acquire Armis, after its Veza acquisition, the combination would confirm ServiceNow expanding its offerings in the space.

Leveraging that across ServiceNow’s customer space that spans about 85% of the Fortune 500, that’s a move that would challenge others looking to tap the AI-enterprise market. That reaffirms our decision earlier this year to exit shares of Elastic (ESTC) .

In terms of NOW shares, let’s see if ServiceNow goes forward with the acquisition, what the terms of any deal and any better understand ServiceNow’s competitive thought process before making any quick decisions.

We suspect that there will be those across Wall Street who come out in support of the M&A move. RBC has already come out and reiterated its NOW price target of $1,200 on the potential of the deal. As more details become clear, or not, we’ll share our more in-depth thoughts and what it means for NOW shares.

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At the time of publication, TheStreet Pro Portfolio was long WELL and NOW.