ServiceNow Earnings: Strength Abounds With Premium AI Solutions Coming in September

ServiceNow Stock at a Glance

• Fair Value Estimate: $625
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

ServiceNow Earnings Update

ServiceNow NOW exceeded our expectations for both revenue and profitability for its second quarter, provided good guidance for the third quarter, and raised its full-year outlook. Strong revenue paired with disciplined operations drove good margins. The firm’s performance is impressive, especially as the macro environment is unchanged. We also see a burgeoning artificial intelligence opportunity with substantially higher pricing than Pro versions that should contribute to revenue later this year.

Based on results and guidance, we are raising our fair value estimate to $625 per share, from $600 previously for wide-moat ServiceNow. We continue to favor the stock for both its resilient near-term performance and 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 22.7% year over year as reported, or 22.5% in constant currency, to $2.150 billion, which was ahead of our model. We note revenue growth accelerated by about 100 basis points, which has been elusive within our coverage over the last six quarters. Strength was driven by solid results across the board, including segments, products, and geographies. We see good momentum in both vertical solutions and premium offerings, which help both growth and margins, as these solutions enjoy a material pricing uplift. Subscription revenue of $2.075 billion grew 25% year over year as reported, which was $30 million above the high end of guidance.

Non-GAAP operating margin was 25.3% for the quarter, compared with 22.8% last year and guidance of 23.0%. Stronger revenue and operating discipline drove margin strength. We see this as showing the firm’s earnings power and see a path to margin expansion beyond management’s 27.0% target for 2024.