ServiceNow, Inc. (NOW) is a provider of end-to-end intelligent workflow automation platform solutions for digital businesses. It operates the NOW platform for end-to-end digital transformation, artificial intelligence (AI), machine learning (ML), robotic process automation, process mining, performance analytics, and collaboration and development tools.
With the ever-expanding horizons and capabilities of artificial intelligence (AI), investors are keen to understand whether ServiceNow is a suitable investment amid evolving tech solutions.
Artificial Intelligence is expanding its scope from tech to all significant industries, including healthcare, industrial operations, biotech, and retail, leading to endless possibilities for its development and growth in the coming years. With this, the AI market is projected to reach $184 billion in 2024. Further, the market is expected to grow to $1.34 trillion by 2030, at a notable CAGR of 35.7%.
However, with the widening exposure and possibilities, the competition in the AI market is becoming more and more rigid. Companies are increasingly investing to make their solutions and offerings outshine their competitors. Thus, this can result in marginal profit share for the industry players.
NOW competes with companies like CrowdStrike Holdings, Inc., SolarWinds Corporation, and Amdocs Ltd., which offer similar products to the customers.
During the second quarter, ServiceNow embarked on various strategic investments and acquisitions. It announced a strategic investment in Prodapt, marking its first Ecosystem Ventures investment in the telecom sector, aiming at digital transformation and enhanced market capabilities. It also partnered with Boomi to improve customer experiences through AI-powered self-service.
According to the company's third-quarter guidance, NOW expects subscription revenues between $2.66 billion and $267 billion, showing a year-over-year growth of 20.5%.
For the full year 2024, NOW's subscription revenues are anticipated to be $10.57 billion - $10.58 billion, reflecting a growth of 22%.
Shares of NOW have gained 7.8% over the past month and 40% over the past year to close its last trading session at $835.86.
Let’s look at factors that could influence NOW’s performance in the upcoming months.
Recent Developments
On July 24, NOW made a strategic investment in Prodapt, a leading telecom services provider. It marks NOW's first Ecosystem Ventures investment in the telecom sector. It is targeted to promote and expand business transformation and develop new Telecom & Technology industry-specific, AI-enabled solutions, enhanced market capabilities, and increased skilling.
On the same date, NOW and Boomi entered a strategic partnership to enhance customer experiences through AI-powered self-service. Under the collaboration, NOW will integrate Boomi’s API Management with its Automation Engine for improved API visibility and governance, while Boomi will use NOW’s solutions to streamline customer support and self-service.
Further, the company also acquired Raytion to enhance GenAI-powered search and knowledge management capabilities on its Platform. Raytion’s industry-leading information retrieval technology enables unified real-time access to business-critical data across multiple enterprise sources for a more powerful, efficient, and personalized AI search experience.
Robust Financials
During the second quarter that ended June 30, 2024, NOW’s total revenues increased 22.2% year-over-year to $2.63 billion, of which its subscription revenues rose 22.5% from the year-ago value to $2.54 billion. Its non-GAAP gross profit grew 23.1% year-over-year to $2.17 billion.
Furthermore, the company’s non-GAAP income from operations of $720 million indicates growth of 32.3% year-over-year. NOW’s non-GAAP net income came in at $651 million and $3.13 per share, up 33.9% and 32.1% from the prior year’s quarter, respectively.
As of June 30, 2024, NOW’s cash and cash equivalents stood at $2.16 billion, compared to $1.90 billion as of December 31, 2023.
Solid Historical Growth
NOW’s revenue grew at a CAGR of 24.4% over the past three years, while its EBITDA improved at a CAGR of 37.3%. Its EBIT increased at a CAGR of 65.9% over the same period, while the company's net income and EPS grew at a CAGR of 88.5% and 86.7% over the same time frame, respectively.
Furthermore, NOW’s tangible book value and total assets have grown at respective CAGRs of 49.2% and 25.6% over the past three years. And its levered free cash flow has increased at a CAGR of 16.1% over the same period.
Favorable Analyst Estimates
Analysts expect NOW’s revenue for the third quarter (ending September 2024) to come in at $2.75 billion, indicating an increase of 20.1% year-over-year. The consensus EPS estimate of $3.45 for the same period reflects an 18.2% year-over-year improvement. Moreover, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.
For the fiscal year (ending December 2024), the company’s revenue and EPS are anticipated to grow 21.7% and 27.9% year-over-year to $10.92 billion and $13.79, respectively. In addition, Street expects its revenue and EPS for the fiscal year 2025 to grow 20.6% and 20.3% from the prior year to $13.16 billion and $16.59, respectively.
Elevated Valuation
In terms of forward non-GAAP P/E, NOW is currently trading at 60.62x, 162.7% higher than the industry average of 23.08x. Also, the stock’s forward EV/Sales and EV/EBITDA of 15.16x and 44.25x are considerably higher than the industry average of 2.80x and 14.20x, respectively.
Additionally, the stock’s forward Price/Sales and Price/Book of 15.76x and 17.38x are 462.5% and 328.3% higher than the industry averages of 2.80x and 4.06x, respectively.
POWR Ratings Reflect Uncertainty
NOW’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. NOW has a B grade for Growth and Sentiment, consistent with its robust historical growth and optimistic analyst estimates.
However, the stock also has a D grade for Value, justified by its higher-than-industry valuation.
NOW is ranked #16 among the 39 stocks in the B-rated Software - Business industry.
Beyond what I have stated above, we have also given NOW grades for Stability, Momentum, and Quality. Get access to all the NOW ratings here.
Bottom Line
NOW has demonstrated impressive growth in revenue and strategic partnerships with innovative entities, strengthening its solid position in the AI-driven solutions segment. The company's innovative AI platform and recent technological upgrades have contributed to its solid performance and market growth.
However, the challenges of maintaining consistent profitability and navigating a highly competitive market cannot be overlooked. Given NOW’s elevated valuation and uncertain near-term growth prospects, waiting for a better entry point in this stock seems prudent.
Stocks to Consider Instead of ServiceNow, Inc. (NOW)
Given its near-term uncertain prospects, the odds of NOW outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these A (Strong Buy) or B (Buy) stocks from the B-rated Software - Business industry instead:
SolarWinds Corporation (SWI)
Amdocs Ltd. (DOX)
VMware Inc. (VMW)
For exploring more A and B-rated software stocks, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
NOW shares were trading at $834.83 per share on Wednesday afternoon, down $1.03 (-0.12%). Year-to-date, NOW has gained 18.17%, versus a 16.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Rjkumari Saxena
Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.
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