Morningstar

ServiceNow Bucks Trend and Delivers Good Earnings Results and Guidance

Stock’s fair value estimate lowered to $600 on tougher economic environment, but shares still undervalued.

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Securities in This Article
ServiceNow Inc
(NOW)

ServiceNow Stock at a Glance

  • Current Morningstar Fair Value Estimate: 600
  • Stock Star Rating: 4 Stars
  • Economic Moat Rating: Wide
  • Moat Trend Rating: Positive

ServiceNow Earnings Update

ServiceNow (NOW) reported upside relative to revenue and margin guidance for its fourth quarter and provided a surprisingly robust outlook for 2023. Currency headwinds improved, which drove most of the revenue upside, while disciplined expense management led to better margins. We view guidance as being about in line, which is surprisingly good in this environment. While we view the quarter as good overall, we have nonetheless lowered our estimates for this year and next as we have become more cautious based on macroeconomic conditions, and are therefore reducing our fair value estimate to $600 per share from $640. We continue to favor ServiceNow as one of our top picks for its long-term organic-driven growth—this is as it leverages its strength in workflow automation to bring its existing customers more deeply into IT, and more broadly with human resources and customer service-specific products, as well as its continued push into industry segment-specialized versions and operating efficiency.

Total revenue grew 20% year over year as reported, or 27.5% in constant currency, to $1.940 billion, compared with FactSet consensus of $1.933 billion. Performance was evenly spread across segments, products, and geographies, with continued strength in specialized industry vertical solutions. Management disclosed 30% growth in net new annual contract value from new customers, which is very strong. Subscription revenue of $1.860 billion as reported grew 22% year over year, including a 550-basis-point headwind from currency. Strength in large deals continues, with 126 deals in excess of $1 million in annual contract value. ServiceNow boasts 1,637 customers generating in excess of $1 million in ACV, which usually implies multiple solutions are involved. To that end, the firm won its largest-ever deal, saw 100% increase in the number of $10-million-dollar deals compared with last year, and saw five of the top ten deals include 10 or more solutions.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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