Key Takeaways

ServiceNow's leadership in AI and strategic alliances with tech giants boost revenue by enhancing customer reach and driving AI solution adoption.
Ambitious growth targets and pricing strategies bolster profitability, with a focus on sustainable high growth and flexible pricing models for long-term revenue.
Transitioning to a hybrid pricing model and investing heavily in AI technology and geo-expansion could impact revenue growth and operational costs, while competition and market dynamics pose additional challenges.

Catalysts

About ServiceNow

Provides cloud-based solution for digital workflows in the North America, Europe, the Middle East and Africa, Asia Pacific, and internationally.What are the underlying business or industry changes driving this perspective?

ServiceNow's leadership in agentic AI, with a projected growth of 150% in quarter-over-quarter deals, positions the company as a front-runner in AI-driven enterprise software. This is expected to boost revenue as more customers adopt AI offerings, leading to further penetration and increased subscription pricing with the Plus SKUs, which deliver over 30% price uplifts.
The company's ambitious midterm target of $15 billion plus by 2026, supported by a Rule of 54 operation, indicates a strong growth trajectory. This is likely to enhance earnings and shareholder value through sustained high growth and profitability.
ServiceNow's investments in consumption-based pricing for AI agents alongside traditional subscription models aim to accelerate adoption and drive long-term incremental revenue growth. This dual pricing strategy is expected to grow net margins by creating flexible pricing models and increased usage over time.
The expansion of strategic alliances with major technology players like AWS, Google Cloud, and Microsoft aims to deliver integrated AI-powered solutions to a broader customer base. This will enhance revenue streams by tapping into these companies' extensive client networks and accelerating the deployment of ServiceNow's solutions.
Commitment to operational efficiencies and consistent margin accretion is demonstrated by exceeding free cash flow guidance, which grew to a 31.5% margin in 2024. This enhances earnings by driving higher incremental free cash flow and maintaining discipline in operational cost management.

ServiceNow Earnings and Revenue Growth

ServiceNow Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

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 76.9x 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

What could happen that would invalidate this narrative?

The transition towards a hybrid pricing model combining subscription and consumption-based pricing for AI services may take time to fully realize its potential, potentially impacting near-term revenue growth as the market transitions and customers adapt to the new pricing model.
ServiceNow's substantial investment in AI technology, along with plans for significant geo-expansion and data center investments related to public cloud partnerships, could exert pressure on operating costs, potentially impacting net margins and free cash flow margins.
Indications of more pronounced seasonal linearity and forecasted back half-weighted growth in U.S. federal business may introduce variable revenue streams and some quarterly volatility, complicating earnings predictability.
The rapid commoditization and falling costs of large language models (LLMs) present an opportunity but also pose a risk by increasing competition in AI platform markets, potentially putting downward pressure on AI-related revenue and margins.
The shift to including elements of consumption-based monetization, while preserving a solid subscription base, may face execution challenges, and any hiccups could affect the company's ability to sustain its historical subscription revenue growth rates.

Valuation

How have all the factors above been brought together to estimate a fair value?

The assumed bullish price target for ServiceNow is $1242.6, which represents two standard deviations above the consensus price target of $1012.64. 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 $1300.0, 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 76.9x, assuming you use a discount rate of 7.6%.
Given the current share price of $766.83, the bullish analyst price target of $1242.6 is 38.3% 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.

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