ServiceNow Earnings: Another Epic Quarter Complete With a Serving of Generative AI Leadership

Key Morningstar Metrics for ServiceNow

• Fair Value Estimate: $900.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of ServiceNow’s Earnings

We are raising our fair value estimate for ServiceNow NOW to $900 per share from $840 after it delivered outstanding results for the third quarter. The company beat the top end of guidance for all key metrics. Guidance was mixed, with upside to revenue but lower margins than reflected in our estimates. Concurrent with earnings, the company announced new products and its hiring of Amit Zavery as president, COO, and chief product officer.

Despite higher near-term growth estimates raising our fair value estimate, we see the stock as fairly valued. While there were many highlights in better-than-expected headline numbers, including revenue and profitability, we were most impressed by the growth in remaining performance obligations, which accelerated again during the quarter. Generative artificial intelligence within the Pro Plus tier continues to attract new customers to the platform and drive upsells from lower pricing tiers, which we think is now clearly placing ServiceNow in a leading position within enterprise software vendors.

We are impressed by ServiceNow’s continued revenue strength. Total revenue grew 22.2% year over year to $2.80 billion, better than expected and driven by many factors, including robust renewals, generative AI, and customer workflow adoption. Subscription revenue of $2.72 billion grew 22.5% year over year, 220 basis points better than the high end of guidance. Strength was seen in all facets of the company’s business, including segments, products, and geographies.

Based on several data points the firm offers, we calculate ServiceNow has nearly $100 million in annual contract value from generative AI. Management called out the technology, media and telecommunication, healthcare, and US federal sectors, among others, as being stout, while reminding investors that macroeconomic conditions are unchanged.