AI Powered Pro Plus And RaptorDB Unification Will Shape Industry

Key Takeaways

• AI-powered offerings and consumption-based pricing models are expected to significantly boost ServiceNow's revenue and earnings through increased customer spending.
  
• Platform unification with cloud integrations and strong growth in Customer and Industry Workflows enhance competitive positioning and market share expansion.
  
• ServiceNow's AI strategy, dependency on external partnerships, and tax changes may introduce revenue volatility, impacting margins, cash flow, and investor confidence.

Catalysts

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

• ServiceNow's launch of AI-powered Pro Plus offerings, with a 150% quarter-over-quarter increase in customer deals, is expected to significantly drive revenue growth by offering substantial value to customers through AI agents and workflow orchestration.
  
• The company's strategic shift to include consumption-based pricing models, alongside traditional subscriptions, is poised to boost earnings as increased usage of AI agents will result in higher customer spending over time due to the “hockey stick” effect in consumption growth.
  
• ServiceNow's platform unification, with RaptorDB and expanded integrations with major cloud providers like Google Cloud and AWS, strengthens their competitive position and is anticipated to enhance net margins through efficient data handling and reduced complexity for clients.
  
• Strong expansion in Customer and Industry Workflows, notably as the fastest-growing part of the business, could elevate ServiceNow's revenue growth by capturing more significant deals and expanding market share in CRM and industry-specific solutions.
  
• ServiceNow's robust balance sheet with $10 billion in cash and strategic share buyback programs are expected to drive earnings per share (EPS) growth, as they continue to manage share count effectively and return value to shareholders.

ServiceNow Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on ServiceNow compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming ServiceNow's revenue will grow by 22.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 13.0% today to 20.8% in 3 years time.
• The bullish analysts expect earnings to reach $4.2 billion (and earnings per share of $17.53) by about April 2028, up from $1.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 77.7x on those 2028 earnings, down from 106.3x today. This future PE is greater than the current PE for the US Software industry at 28.8x.
• 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 7.58%, as per the Simply Wall St company report.

ServiceNow Future Earnings Per Share Growth

Risks

• ServiceNow's shift towards a hybrid consumption and subscription model for their AI solutions may initially slow subscription revenue growth, as the consumption element requires time to materially impact financials, potentially affecting short-term revenue visibility and cash flow.
  
• The incremental cash tax headwind anticipated for 2025 could negatively impact ServiceNow's free cash flow margin, which may strain net margins as the company adapts to tax changes affecting operating margins and liquidity.
  
• The anticipated back-end weighted deal linearity in the 2025 U.S. federal business due to the presidential election could lead to potential revenue timing issues, impacting overall revenue stability and earnings predictability.
  
• The company's heavy reliance on partnerships with hyperscalers and third-party large language model providers for AI capabilities introduces the risk of cost fluctuations or unfavorable partner terms, which could affect profitability and operating margins if integration costs rise or partner benefits diminish.
  
• ServiceNow's AI expansion strategy involves foregoing upfront subscription fees to drive faster AI adoption, a move that may delay revenue recognition and increase short-term earnings volatility, impacting earnings consistency and potentially affecting investor confidence.

Valuation

• The assumed bullish price target for ServiceNow is $1263.03, which represents one standard deviation above the consensus price target of $1116.16. This valuation is based on what can be assumed as the expectations of ServiceNow's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1426.0, and the most bearish reporting a price target of just $716.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $20.3 billion, earnings will come to $4.2 billion, and it would be trading on a PE ratio of 77.7x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $735.5, the bullish analyst price target of $1263.03 is 41.8% 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.