ServiceNow is turning into an AI software program chief.
ServiceNow (NOW 0.85%) has quietly been one of many best-performing shares of the previous decade, gaining greater than 1,300% throughout that span. That momentum has continued this 12 months with the fill up about 35% in 2024.
In the meantime, traders just lately cheered the corporate’s third-quarter earnings outcomes. Let’s take a better take a look at these outcomes to see if the inventory can proceed its momentum.
An AI software program winner
For these unfamiliar with ServiceNow, it is a software-as-a-subscription (SaaS) firm whose platform permits prospects to attach and convey collectively siloed programs to raised handle workflows. It initially began out within the IT service administration (ITSM) market to assist IT departments handle their networks, however it has since moved into different areas such customer support and human sources. It additionally has a platform for things like automation and procurement.
The corporate has been an early software program chief in synthetic intelligence (AI), with its Now Help AI the fastest-growing resolution in firm historical past. Nonetheless, it nonetheless thinks the most effective days are forward of it, and it simply made its largest generative AI launch up to now in Xanadu, which may do things like help with analytics era, customized abilities improvement, and Microsoft Copilot integration. It is usually transferring into agentic AI, which may clear up issues and full duties autonomously. ServiceNow has constantly put up robust income progress, and that continued in Q3, with income rising 22% to $2.8 billion.
That topped the typical estimate of $2.75 billion, as compiled by FactSet. Subscription income jumped 23% to $2.7 billion. Skilled providers income rose 14% to $82 million. Adjusted earnings per share (EPS) of $3.72, in the meantime, simply beat common analyst estimates of $3.45. The corporate ended the quarter with 2,020 prospects with web annual contract worth (ACV) of $1 million or extra, a rise of 14%. The typical ACV of those prospects, in the meantime, rose to $4.8 million in comparison with $4.4 million a 12 months in the past, a 9% improve.
This exhibits it’s each including extra massive prospects and seeing the dimensions of those prospects develop. One metric traders prefer to comply with with ServiceNow is RPO progress, which is deferred income plus backlog progress. This may be a sign of future income progress. Within the quarter, the corporate noticed RPO rise 26% to $19.5 billion, whereas present RPO (cRPO) jumped 23.5% to $9.4 billion.
This means that income progress of greater than 20% ought to proceed. Turning to the steadiness sheet, the corporate ended the quarter with $9.1 billion in money and investments and $1.5 billion in debt. Trying forward, ServiceNow forecast fourth-quarter subscription income to develop between 21.5% and 22%.
It’s anticipating cRPO to rise by 21.5%. For the total 12 months, the corporate projected subscription income of $10.655 billion to $10.660 billion, representing progress of 23%. That is up from a previous outlook for subscription income to extend 22%.
Picture supply: Getty Photographs
Can ServiceNow inventory’s momentum proceed
If software program turns into the following huge AI class winner for shares, ServiceNow seems nicely positioned to be one of many firms main the way in which. It’s transferring from generative AI to agentic AI, which Nvidia has known as the following frontier in AI. In the meantime, the corporate believes it has a robust first-mover benefit in generative AI.
ServiceNow’s aim is to assist enhance productiveness via AI, which is one thing organizations are at all times seeking to do to avoid wasting money and time, and they’re actually prepared to spend to attain this. This could arrange the corporate for continued and sustained progress.
From a valuation perspective, the inventory now trades at a ahead price-to-sales a number of of about 15 based mostly on 2025 analyst estimates. Its a number of has now about doubled over the previous two years.
NOW PS Ratio (Ahead 1y) knowledge by YCharts
If ServiceNow can benefit from the AI alternative in entrance of it, it may possibly greater than develop into its present valuation. Nonetheless, such a excessive valuation additionally leaves much less room for error. As such, I would most likely attempt to hold positions within the inventory on the smaller facet in the intervening time.
Geoffrey Seiler has no place in any of the shares talked about. The Motley Idiot has positions in and recommends FactSet Analysis Methods, Microsoft, Nvidia, and ServiceNow. The Motley Idiot recommends the next choices: lengthy January 2026 $395 calls on Microsoft and brief January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure coverage.
