AI Focus Will Expand Market But Competitive Risks Remain

Key Takeaways

• Strategic focus on AI and partnerships are expanding ServiceNow's market, potentially boosting future subscription revenues and revenue growth.
  
• Emphasis on execution, partnerships, and R&D investment enhances revenue stability, market share, and profitability prospects.
  
• Reliance on large deals and intense AI competition, along with macroeconomic challenges, could pressure revenue growth and margins.

Catalysts

Provides end to-end intelligent workflow automation platform solutions for digital businesses in the North America, Europe, the Middle East and Africa, Asia Pacific, and internationally.

• ServiceNow's strategic focus on AI, particularly with Now Assist and the launch of Xanadu, positions the company as a leader in AI-driven business transformation, potentially boosting future subscription revenues through increased customer adoption.
  
• The partnership with NVIDIA to develop AI agents and integrate AI into operations, along with innovations like RaptorDB and Workflow Data Fabric, are expanding ServiceNow's addressable market and could drive significant future revenue growth.
  
• The company's emphasis on elite level execution and strategic customer partnerships are leading to larger and longer-term contracts, likely supporting future revenue stability and profitability.
  
• An increasing focus on customer workflows and front office disruption has the potential to capture a larger share of the market, driving future revenue and gross margin expansion.
  
• Robust investment in R&D and strategic leadership hires, such as Amit Zavery, signal increased capacity for product innovation and efficiency improvements, which could lead to enhanced net margins and earnings growth in the future.

ServiceNow Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ServiceNow's revenue will grow by 20.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.8% today to 15.2% in 3 years time.
• Analysts expect earnings to reach $2.8 billion (and earnings per share of $12.45) by about December 2027, up from $1.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 103.1x on those 2027 earnings, down from 172.1x today. This future PE is greater than the current PE for the US Software industry at 42.0x.
• Analysts expect the number of shares outstanding to grow by 2.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.97%, as per the Simply Wall St company report.

ServiceNow Future Earnings Per Share Growth

Risks

• There is a heavy reliance on forward-looking statements which involve risks, uncertainties, and assumptions, potentially impacting future earnings and revenue forecasts.
  
• The competitive environment for AI solutions is intensifying; failing to maintain a leadership position in this area could adversely affect revenues and market share.
  
• Concerns about achieving and sustaining high subscription revenue growth rates and maintaining operating margins might pressure future net margins.
  
• Global economic factors and the macroeconomic environment present challenges, which could impact customer demand and consequently revenue and earnings growth.
  
• There is significant emphasis on relying on large deals and new customer acquisitions for growth; any decline in the ability to secure such deals could affect future revenue potential.

Valuation

• The analysts have a consensus price target of $1050.06 for ServiceNow based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1300.0, and the most bearish reporting a price target of just $716.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.2 billion, earnings will come to $2.8 billion, and it would be trading on a PE ratio of 103.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of $1114.72, the analyst's price target of $1050.06 is 6.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.