Which AI Stock Is A Better Buy?

It’s been a brutal start to 2026 for many software stocks. While the S&P 500 is down about 0.5% year-to-date at the time of this writing, shares of major software giants Salesforce (NYSE: CRM) And ServiceNow (NYSE: NOW) have fallen by approximately 26% and 23% respectively.

The widespread sell-off in software-as-a-service stocks comes as investors reassess software valuations amid fears that artificial intelligence (AI) could disrupt established software companies. Yet both tech companies argue that AI is actually becoming a major enabler for their businesses, and are successfully monetizing new generative AI products.

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With both stocks down this year, investors may be wondering if this is a good opportunity to buy the dip. But which growth stocks are the better buy right now?

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Salesforce has dominated the CRM (Customer Relationship Management) space for years, and the company continues to generate massive amounts of cash while increasing its profitability. And in the recently reported fourth quarter of fiscal 2026, non-generally accepted accounting principles (non-GAAP) operating margin rose to 34.2%, up from 33.1% a year ago.

The company is also seeing real progress with its AI initiatives. The Agentforce platform reached $800 million in annual recurring revenue in the fourth quarter, an impressive 169% year-over-year increase.

And the robust demand for its services is reflected in the growing backlog. The company’s remaining performance obligations (RPO) increased to $72 billion, up 14% year over year.

However, while the company’s profitability has increased significantly, its underlying revenue momentum has cooled. Adjusting for the company’s recent acquisition of Informatica, Salesforce’s fourth-quarter organic revenue growth slowed to about 8% year-over-year – compared to 9% organic growth in the third quarter. Worse still, underlying organic revenue growth implied by management’s guidance for fiscal 2027 is between 7% and 8%.

ServiceNow, on the other hand, continues to post spectacular figures.

The business workflow software specialist’s subscription revenues reached $3.47 billion in the fourth quarter, up 21% year over year. In fact, the company’s current RPOs, which it defines as contract revenue expected to be recognized in the next twelve months, rose to $12.85 billion. This represents a 25% increase year-on-year, indicating robust future demand.

Moreover, like Salesforce, ServiceNow is successful in monetizing AI. Management noted that annual contract value for Now Assist, its embedded generative AI experience, exceeded $600 million in the fourth quarter. Additionally, the company said Now Assist’s net new contract value doubled year over year in the fourth quarter.

In addition to rapid revenue growth, ServiceNow is converting a large portion of its revenue into cash, with a staggering 57% free cash flow margin in the fourth quarter.

And management expects this strong momentum to continue. For the first quarter of 2026, ServiceNow achieved subscription revenue of up to $3.66 billion, implying approximately 21.5% year-over-year growth.

This growth is supported by an aggressive share buyback program. To underscore management’s confidence in the stock, the board authorized another $5 billion in share buybacks and announced an upcoming $2 billion accelerated share buyback.

When comparing these two deteriorating software stocks, ServiceNow is the easy choice.

Investors are obviously willing to pay a higher valuation for ServiceNow’s superior growth. At the time of writing, the stock is trading at a price-to-earnings ratio of roughly 29 and a price-to-sales ratio of roughly 10. At this valuation, ServiceNow stock is priced for a high-growth world for the foreseeable future.

Salesforce trades at a lower valuation (a price-to-earnings ratio of around 15 and a price-to-sales ratio closer to 5 for Salesforce), but that discount reflects slowing organic growth in the high single digits.

Ultimately, ServiceNow’s combination of accelerating near-term growth, increasing cash flow generation and an aggressive share repurchase program makes it a more attractive long-term investment. I would much rather pay a premium for a company growing at 20% than buy a slower growing incumbent.

But investors should remember that both ServiceNow and Salesforce are risky stocks operating in rapidly changing industries where AI is a potential threat. Yes, AI can also be a tailwind. But it is not yet clear whether the benefits outweigh the risks.

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Daniel Sparks and his clients have no positions in the stocks mentioned. The Motley Fool holds and recommends positions in Salesforce and ServiceNow. The Motley Fool has a disclosure policy.

Salesforce vs. ServiceNow: Which AI Stock is a Better Buy? was originally published by The Motley Fool