AI Investments And Partnerships With AWS, Google Cloud, And Microsoft Will Deliver Broader AI Solutions To Enterprises

Key Takeaways

• Strategic expansion into agentic AI and Pro Plus AI offerings positions ServiceNow as a leader in enterprise AI, boosting future revenue and customer adoption.
  
• Alliances with AWS, Google Cloud, and Microsoft enhance market reach, driving increased sales and improving net margins through partner scale and reach.
  
• Strategic shifts toward AI and subscription models face challenges like customer adoption, competitive pressures, and geopolitical factors, impacting growth and margin sustainability.

Catalysts

Provides cloud-based solution for digital workflows in the North America, Europe, the Middle East and Africa, Asia Pacific, and internationally.

• ServiceNow's strategic expansion into agentic AI, with significant quarter-over-quarter growth in their Pro Plus AI offerings, positions them as a leader in the AI-driven transformation of enterprise operations, likely boosting future subscription revenue and customer adoption.
  
• The integration of RaptorDB and the Workflow Data Fabric into ServiceNow's platform enhances their data capabilities and broadens their addressable market, which should drive incremental revenue growth by offering improved performance and efficiency for enterprise customers.
  
• A hybrid pricing model combining subscription and consumption-based pricing is expected to accelerate customer adoption of AI capabilities, with consumption-driven revenue growth potentially providing significant lift to future earnings as adoption scales.
  
• ServiceNow's strategic alliances with major partners like AWS, Google Cloud, and Microsoft to deliver AI-powered solutions are expected to expand market reach and drive increased sales, contributing positively to revenue and net margins by leveraging the scale and reach of these partners.
  
• Continued platform expansion into sectors such as the public sector and manufacturing, coupled with strategic investments in technology integration and a focus on customer-specific workflow solutions, is poised to sustain high revenue growth rates and enhance operating margins by capturing a larger share of industry-specific enterprise IT spend.

ServiceNow Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ServiceNow's revenue will grow by 19.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 16.7% in 3 years time.
• Analysts expect earnings to reach $3.1 billion (and earnings per share of $14.16) by about April 2028, up from $1.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $4.2 billion in earnings, and the most bearish expecting $2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 85.4x on those 2028 earnings, down from 111.4x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 0.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.62%, as per the Simply Wall St company report.

ServiceNow Future Earnings Per Share Growth

Risks

• The adoption of a hybrid consumption and subscription pricing model for AI capabilities, while strategic, could lead to initial complexities or slower uptake from customers, impacting short-term subscription revenue growth.
  
• The reliance on AI agents for business processes assumes rapid adoption and effective execution within customer organizations, which may not materialize as expected, potentially affecting revenue growth and customer retention.
  
• The rapid commoditization of AI models, while beneficial in reducing input costs, increases competition and pressure on ServiceNow to maintain high-value differentiation, which could pressure margins and market positioning.
  
• The significant investment in AI and new product development, while strategically valuable, requires effective execution to yield the expected return on investment and maintain operating margin targets.
  
• Currency fluctuations and geopolitical factors, such as the potential impact of U.S. presidential administration changes on federal spending, could affect top-line growth forecasts and introduce variability into cRPO and net margins.

Valuation

• The analysts have a consensus price target of $1012.636 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 2028, revenues will be $18.6 billion, earnings will come to $3.1 billion, and it would be trading on a PE ratio of 85.4x, assuming you use a discount rate of 7.6%.
• Given the current share price of $766.83, the analyst price target of $1012.64 is 24.3% higher.
• 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.