Company profile
Introduction
ServiceNow (ticker: NOW) is a software company focused on developing cloud computing platforms to help companies manage digital workflows for business operations.
Company founded
ServiceNow was founded by Fred Luddy in 2003 as Glidesoft, Inc. In 2006, the company was renamed Service-Now.com. 2007 was also the first year that the company’s “cash flow turned positive.” About 30% of the company’s revenue comes from outside the United States.
Initial public offering
ServiceNow went public on June 29, 2012 at $18 per share. In June 2023, ServiceNow became a Fortune 500 company.
Products and operations
Product
ServiceNow is a Platform as Service that implements enterprise and technology management support systems, such as IT service management and help desk functions. The core business revolves around the management of IT operational events such as incidents, problems, and changes.
For enterprise customers, the solutions sold by ServiceNow mainly include customer service software, human resources, etc.
Resources, security, workflow and other features that all businesses will use.
The charging model is priced per user per month, starting from US$100.
Artificial Intelligence Integration Strategy
ServiceNow is known for its cloud computing platform that helps enterprises automate operations, manage digital workflows and innovate efficiently. Now Platform is the company’s flagship product, enabling enterprises to leverage embedded artificial intelligence and machine learning technology to streamline processes and increase productivity. ServiceNow’s strategy focuses on driving AI integration and building partnerships to expand capabilities and market reach. Key to ServiceNow’s strategy is a commitment to artificial intelligence and machine learning initiatives, and the release of platform Xanadu marks a substantial leap in capabilities.
Management continues to focus on artificial intelligence development and strategic partnerships to drive growth. Investors should pay attention to how ServiceNow leverages its technological advancements and partnerships, as well as how it addresses potential industry challenges. As ServiceNow ramps up its innovation capabilities, its ambition to expand market share remains a focus.
Strategic partnerships are a focus, including major collaborations with Nvidia, Siemens, and Zoom Video Communications, which strengthen the integration of cutting-edge artificial intelligence solutions. These alliances enhance ServiceNow’s ability to deliver transformational value across industries and enhance its product offerings.
Acquisitions
Since its establishment, ServiceNow has continued to carry out more than 20 mergers and acquisitions to strengthen the capabilities of the platform provided by the company and expand its customer base.
Competitors
Since ServiceNow’s solutions include the main functions required by enterprises, almost all enterprise software vendors are its opponents. Listed below are ServiceNow’s main opponents.
KKR’s BMC (tickere: KKR), Microsoft (ticker: MSFT), IBM (ticker: IBM), Atlassian (ticker: TEAM), SAP (ticker: SAP), Broadcom (ticker: AVGO) , Salesforce (ticker: CRM), Oracle (ticker: ORCL), Cisco’s Splunk (ticker: CSCO), etc. are relatively large and well-known software companies in the market.
Operating performance
2024 Q3 results
ServiceNow reported third-quarter earnings on Wednesday, October 23, with both revenue and profit beating analysts’ expectations.
ServiceNow reported subscription revenue of $2.72 billion, up 23% from the same period last year. ServiceNow reported GAAP operating income of $418 million, up 81% from the third quarter of 2023, with adjusted operating margin rising to 31%.
Highlights from 2024 Q3 results
Although ServiceNow’s revenue indicators increased by double digits annually, its subscription service gross profit reached US$2.22 billion, with a GAAP profit margin of 82%, highlighting effective cost control.
ServiceNow has achieved significant commercial success, including 15 major deals with annual contract values (ACV) in excess of $5 million, representing 50% year-over-year growth. The client base with over $1 million in ACV increased by 14%, emphasizing successful client acquisition and retention.
Outlook for 2024
ServiceNow raised its full-year 2024 subscription revenue guidance to a range of $10.655 billion to $10.66 billion (from $10.575 billion to $10.585 billion), reflecting increased confidence. It also showed strong momentum, powered by the Now platform and its artificial intelligence products. The outlook for non-GAAP operating margin of 29.5% highlights its efficiency initiatives.
Company prospect
Industry prospects
The stock already looks expensive, with ServiceNow’s software in high demand as companies look for ways to increase employee productivity. However, the stock’s high price-to-earnings ratio has delivered plenty of growth.
2025 Outlook
Based on 2025 earnings forecasts, the stock currently trades at a forward price-to-earnings ratio of 55.5 times. Even relative to ServiceNow’s potential growth, this is expensive. ServiceNow’s subscription revenue increased 23% year over year in the second quarter. The company expects full-year revenue and free cash flow to grow 22% and 31% respectively.
Several reasons to investing in ServiceNow
There are several reasons to justify paying a premium for the shares, and why they’re likely to hit analyst price targets.
Subscription model
ServiceNow benefits from a subscription-based business model that converts subscription revenue into free cash flow at high margins of 30%. Highly profitable businesses with recurring revenue typically command premium valuations.
Many cloud software companies have struggled in recent years as macroeconomic headwinds have intensified. However, ServiceNow’s slowdown was less severe, which is a testament to ServiceNow’s capabilities.
Workflow leader
ServiceNow is considered the leader in workflow management software, and businesses cannot do without it. ServiceNow expects its near-term growth to be driven by new government contracts and continued use of its Now Assist-generated AI tools, as revenue related to its business-transforming AI platform is increasing significantly.
In particular, ServiceNow currently provides the company’s Now Assist product through Microsoft’s Copilot. ServiceNow’s Now Assist signed 11 deals in the second quarter, each worth more than $1 million.
Outstanding performance in the past
Over the past five years, ServiceNow’s forward price-to-earnings valuation multiple has averaged as low as 26 times and as high as 95 times. Shares of companies like ServiceNow that can sustain above-average growth may look expensive for years, but they continue to outperform the market.
Capital market performance
Maket valuation
As of October 23, 2024, ServiceNow’s market value is US$186.98 billion, and its price-to-earnings ratio is 164.
Stock price performance
As of October 23, 2024:
- Since the company went public on June 29, 2012, the stock price has increased by 3,589.76% in the past 13 years.
- The company’s stock price has increased by 276.29% in the past five years.
- The company’s stock price has increased by 63.73% in the past year.
With such performance, among the large listed software companies in the US stock market, the performance of the stocks I track should rank among the top.
Conclusion
ServiceNow’s stock isn’t cheap, and its forward price-to-earnings ratio remains high, but it still has plenty of room to grow. It is expected to generate at least $15 billion in subscription revenue by 2026, which represents a compound annual growth rate of 20% starting in 2023.
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