The Morning Download: Investors Raise the AI Bar

Good morning. Tech company stocks that once rose together on a wave of excitement over AI are now being valued on their own specific outlook. It’s still possible to break through, but the bar is incredibly high, and the tech company valuations are diverging.

Below are highlights from Dan Gallagher’s Heard on the Street column in the WSJ comparing late yesterday’s quarterly reports from Meta Platforms and Microsoft:

Revenue and operating income at both slightly exceeded Wall Street’s expectations for the December-ended quarter, but Meta projected an acceleration in top-line growth for the March quarter while Microsoft’s forecast implied a slowdown in growth for its larger revenue base.

Meta said Wednesday that it expects first-quarter revenue to grow 30% year over year to $55 billion at the guidance midpoint.

Meta has a simpler business model, with 98% of its revenue coming from advertising. Microsoft, by contrast, serves a highly complex mix of businesses, consumers and even gamers, with a sharp drop in Xbox sales weighing down its More Personal Computing segment in the holiday quarter. But Microsoft’s Azure cloud-computing business is the most closely watched by investors for AI impact, and that didn’t come through this time either. Azure’s revenue grew 39% year over year in the December quarter—decelerating slightly from 40% growth in the previous period.

Given that slight deceleration, Microsoft shares fell about 6% in premarket trading Thursday, the WSJ said. And shares of ServiceNow fell even though its quarterly results, also released late yesterday, beat expectations.

I spoke to ServiceNow CEO Bill McDermott yesterday afternoon and he argued that the company, so central to CIOs, should be understood as a platform or control tower for enterprise technology, not as a more limited software-as-a-service business.

Here are highlights of that conversation, focusing on his vision for the company and enterprise software as they evolve with AI.

Software companies are often judged by the so-called Rule of 40, in which the annual revenue rate and profit margin must exceed 40%. ServiceNow CEO Bill McDermott said the company has achieved a "Rule of 55" year, in which revenue growth and free cash flow margin hit 55 and are trending toward 57.

Late yesterday, the company with a market cap of $134.6 billion announced quarterly subscription revenue growth of 21%, beating the high end of guidance as well as analyst estimates measured by FactSet. The company also said it beat expectations for the full year and guided to subscription revenues of $15.53 to $15.57 billion, which are above FactSet consensus of $15.22 billion.

Shares fell. It was trading this morning at $129.62, down from a 52-week high of $211.478. Even so, it has a PE ratio of 77.78.

I asked McDermott to explain his vision for ServiceNow. Here are edited highlights of the conversation:

WSJ Leadership Institute: How do you explain investor sentiment toward ServiceNow?

McDermott: So why is the stock not moving in conjunction with the results? Here's why. Because there was a re-rating of SaaS companies, across the industry. And I'm constantly reminding really critical thinkers that we don't live in a SaaS neighborhood and I don't want to have the most beautiful house in a SaaS neighborhood. I want everybody to understand, we're playing an entirely different game. We're not a feature company and we're not a function company, we're a platform company and we go across end-to-end all functions of a company, from IT to employee experience, to the customer and the developer experience, all of this is done on one platform.

The other concern that was out there... language models compress seat utilization for software companies. Yeah, probably some of them, but not ours. Our active users and the seats are growing 25% year-over-year in our hybrid pricing model, which takes into account seats plus consumption.

WSJLI: What is the mission of that platform in today’s enterprise technology environment?

McDermott: They are using ServiceNow as the great consolidator. Our platform gives you all the governance, the risk management and controls, the security, the auditability, the complete deterministic desire to run a great business in one platform. This platform seamlessly integrates with all hyperscalers, all large language models… with all the data lakes and integrates with all the archaic systems of record that have been in enterprises for six decades and as you know … nobody's pitchforking that stuff out. They’re getting rid of the feature companies are consolidating the function companies and then moving it onto the workflow automation. They might still use the function companies as a database to feed the ServiceNow platform, but it's no longer the strategic relevance that it once was because of AI. 

WSJLI: How do the company’s recent acquisitions, including Armis and Moveworks, fit into the platform?

McDermott: We took on Armis to give you visibility into the OT, the operating technology. So before incidents actually happen, you have real-time … discovery, and classification of every asset … the IT, OT, IoT, medical devices, industrial controllers, and even shadow IT... is continuously updated [at] machine speed.

Moveworks is the front door to agentic AI for all enterprises around the world … any employee or customer is going to [be] able to access any data from any source and they're going to then get an answer...and then ultimately whatever decision needs to be taken, will be taken on the ServiceNow platform at machine speed.

WSJLI: Company shares are down following the announcement of your quarterly results. How do you view the market’s reaction?

McDermott: Our fundamentals tell the real story. We significantly beat expectations in Q4 and full year. We've come into 2026 with a great guide above all analyst expectations. The customer alone determines who wins and who loses…..I couldn’t be more confident in our market leading position.

When being one of the biggest AI spenders still isn’t enough. Microsoft said Wednesday that Azure grew 39% in the most recent quarter, right in line with Wall Street’s forecasts, but a notch below the 40% growth of the prior period, WSJ reports.

Azure remains the barometer for how much AI is lifting Microsoft’s business, and investors reacted quickly. Microsoft shares fell about 5% in after-hours trading.

CFO Amy Hood acknowledged the bind. Microsoft has to split its GPU capacity between its own internal AI efforts and customers using its cloud-computing services for AI computing. If the company had funneled all of those chips into Azure, she said, cloud growth would have topped 40% in the latest quarter.

In contrast, Meta Platforms projected an acceleration in top-line growth boosted by record ad sales—a sign, in investors’ eyes, that its own eye-popping AI spending is starting to pay off. The company’s advertising and other units brought in $59.9 billion, a 24% year-over-year increase.

Meta mostly mum on new models. It has been nearly eight months since Meta took a 49% stake in Scale AI, hiring its CEO, Alexandr Wang, as its new chief AI officer, and essentially kicking off the mother of all talent wars. So where are the models?

“Over the coming months, we’re gonna start shipping our new models and products,” Zuckerberg told analysts on a call Wednesday. “I expect our first models will be good, but more importantly, we’ll show the rapid trajectory that we’re on.” He offered no specifics on timing.

Wang in an internal meeting in December said Meta’s latest AI models were expected to be released in the first half of this year, WSJ reported.

But Zuckerberg did hint at AI-powered shopping assistants, a topic both Google and OpenAI have embraced in recent months, as we reported. “New agentic shopping tools will allow people to find just the right set of products from the businesses in our catalog,” he said. 

Finance chief Susan Li added that Meta has seen a 30% year-over-year increase in output per engineer, largely driven by AI coding tools, and that power users have seen an 80% output increase.

IBM's AI-powered comeback. “What you’re seeing is the early indications of moving from what I’ll call industry experimentation to we are now beginning to the cycle of scaling,” said Chief Financial Officer Jim Kavanaugh Wednesday as the company posted a fourth-quarter profit of $5.60 billion, fueled by its AI business. 

IBM’s generative-AI book of business now tops $12.5 billion, up $3 billion from the third quarter. Kavanaugh said he expects that pace of growth to continue, helping explain IBM’s December move to pay $31 a share for Confluent, the data-infrastructure company whose technology helps manage real-time data streams for AI models.

SAP cloud guidance disappoints. The German business-software group said its current cloud backlog—a closely watched measure of sales SAP expects to recognize over the upcoming year based on existing contracts—grew 25% at constant currencies in the fourth quarter, below investors expectations. The company said it expects cloud revenue to grow between 23% and 25% at constant currencies this year. The market had expected growth between 24% and 26%.

$135 billion. The top end of Meta's forecast for 2026 capital expenses, about 20% higher than Wall Street expectations and nearly double last year’s investment level as the great AI data center buildout grinds on. 

45%. The percentage of Microsoft's cloud commitments that come from OpenAI. Microsoft shared the figure from the first time Wednesday. Investors have been eager to learn more about the degree to which Microsoft’s AI cloud business rests on the ChatGPT maker.

16%. How much Tesla EV sales fell during the most recent quarter from a year earlier, the result of growing competition from car makers in the U.S. and China and ongoing repercussions of Elon Musk's turn to partisan politics. 

This Office Building Now Has a Videogame on Its Lobby Ceiling (WSJ)

Napster Is Doing AI Music Now — and Still Taking Shots at the Major Labels (Rolling Stone)

Anthropic Is at War With Itself (The Atlantic)

Nvidia comes back to China (officially). China approved purchases of Nvidia’s H200 artificial-intelligence chip for the first time, with the initial batch slated towards major technology companies including Alibaba and ByteDance, WSJ reports. The long-awaited move came during a trip to China by Nvidia CEO Jensen Huang and more than a month after the Trump administration gave Nvidia permission.

Customer service gets botted. Few professions are viewed as more vulnerable to AI disruption—and VCs are leaning in. Bloomberg reports that Decagon AI, which lets businesses build and manage their own customer service AI agents with natural language, raised $250 million, tripling its valuation to $4.5 billion. Coatue Management and Index Ventures led the round, alongside existing investors Andreessen Horowitz and others.