ServiceNow, Inc. (NOW): A Bull Case Theory

We came across a bullish thesis on ServiceNow, Inc. (NOW) on Substack by Daan Rijnberk. In this article, we will summarize the bulls’ thesis on NOW. ServiceNow, Inc. (NOW)’s share was trading at $1008.29 as of Feb 7^th. NOW’s trailing and forward P/E were 147.41 and 61.35 respectively according to Yahoo Finance.

ServiceNow, a leading enterprise software (SaaS) provider, continues to be a top contender in the market, demonstrating exceptional growth and a durable competitive moat. The company’s platform is technologically advanced, allowing it to maintain an impressive customer retention rate of over 98%, which underpins its reliable, recurring revenue model. ServiceNow’s consistent performance, even amidst economic challenges, speaks to the robustness of its business model. The company has exhibited remarkable resilience, with no quarter showing negative year-over-year (YoY) growth and consistently posting YoY growth above 20%. This consistency has made ServiceNow a dominant player, steadily increasing market share and expanding both top and bottom-line growth by over 20% each quarter.

The company’s strong financials, healthy margins, and solid balance sheet reinforce its potential for continued growth, bolstered by its presence in rapidly expanding markets and its role in integrating functional AI capabilities into its offerings. ServiceNow’s platform is widely adopted, with over 90% of Fortune 500 companies and numerous government institutions relying on its services. Despite its commanding position, ServiceNow’s valuation has historically reflected this success, often trading at demanding multiples of 20x sales and 80x earnings, making it a challenging entry for new investors looking for a favorable price point. For months, ServiceNow’s stock price did not show the necessary weakness to prompt an investment.

However, a significant development occurred following the release of the company’s Q4 earnings, which led to a sharp sell-off of 11.5% after the market reacted negatively to the report. Despite the strong performance—revenue growth exceeding 20% YoY and surpassing management’s guidance—Wall Street’s high expectations for ServiceNow meant that simply meeting forecasts wasn’t enough to placate investors. The decline was seen as an overreaction, with the company continuing to show impressive growth, robust cash flows, and a healthy balance sheet, despite some guidance being slightly lower than expected. The market seemed to undervalue the company’s continued track record of growth and solid operational execution.

In Q4, ServiceNow reported subscription revenue growth of 21% YoY to $2.87 billion, matching consensus estimates. While this marked a slight deceleration from previous quarters, it remains an impressive feat given the size of the company’s revenue base and the ongoing pressure in the enterprise software sector, especially with constrained IT budgets. Nevertheless, ServiceNow’s renewal rate remains strong at 98%, signaling that customers continue to find significant value in its platform, even amid tighter budgets. Furthermore, the company’s remaining performance obligations (RPO)—a key indicator of future revenue growth—showed a healthy 23% YoY growth, reinforcing the continued demand for its solutions. In Q4 alone, ServiceNow signed 19 deals with annual contract values over $5 million and secured its largest deal to date, emphasizing its ongoing market dominance.

Looking ahead, ServiceNow is poised to benefit from the global shift toward AI adoption. As companies increasingly seek to automate workflows, enhance decision-making, and improve efficiency, ServiceNow’s platform is strategically positioned to capitalize on these trends. The company’s integration of generative AI into its offerings is already paying off, with AI-driven revenues growing significantly in Q4, and the adoption of AI tools expected to accelerate in the coming years. Despite using a consumption-based model for its AI services, which may slow initial revenue realization, this approach positions ServiceNow for long-term growth, with the potential for substantial financial benefits as AI features become more integrated into customer workflows.

ServiceNow’s strong foundation in AI, coupled with its proven ability to thrive in challenging market conditions, reinforces its position as a top player in the SaaS industry. The company is well-positioned to continue its rapid growth, supported by its dependable subscription model and the increasing value it delivers to enterprise customers. Despite the recent market pullback, ServiceNow’s long-term prospects remain robust, with significant upside potential driven by AI adoption and expanding customer needs. At prices below $1,000 per share, ServiceNow offers an attractive investment opportunity, with the potential to deliver annual returns exceeding 11% (CAGR). A target price of $1,505 per share by the end of 2027 is supported by these growth prospects.

ServiceNow, Inc. (NOW) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 78 hedge fund portfolios held NOW at the end of the third quarter which was 97 in the previous quarter. While we acknowledge the risk and potential of NOW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NOW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.