AI And Critical Partnerships Propel The Company To New Heights In Innovation And Revenue Growth

Key Takeaways

• Leveraging AI and GenAI across its platform with products like Now Assist positions ServiceNow for future growth through increased subscription revenues.
  
• Expanded partnerships, especially with Microsoft, and entry into new markets like OT, signal wider addressable markets and potential for increased revenue.
  
• High executive turnover, scrutiny on hiring, reliance on longer contracts, intense AI and cloud computing competition, and risky rapid expansion could destabilize ServiceNow.

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 is leveraging AI and GenAI across its platform, resulting in the introduction of highly demanded products like Now Assist, which has become the fastest-growing new product in the company's history. This focus on AI is expected to drive future growth through increased subscription revenues.
  
• The company's expanded partnership with Microsoft and integration with Copilot and Azure is opening up new addressable markets and co-selling opportunities. This partnership is likely to attract more enterprise customers to ServiceNow, ultimately impacting net new Annual Contract Value (ACV) and subscription revenue positively.
  
• ServiceNow's entrance into operational technology (OT) and sales and order management workflows significantly expands its total addressable market (TAM), suggesting future revenue growth opportunities as the company taps into new industry verticals and enhances its platform's capabilities.
  
• The introduction of RaptorDB addresses the high priority for CIOs to manage data more efficiently and supports AI use cases with speed and scale. This innovation not only increases ServiceNow's platform appeal but also opens up a new TAM for data management solutions, potentially accelerating revenue growth.
  
• ServiceNow's commitment to expanding its partner ecosystem, including with global brands and expanded multiyear agreements, is expected to extend its go-to-market reach and fuel growth. Partnerships with companies like Boomi and engagements in new geographic markets and verticals like telecommunications indicate future revenue growth from a broadened customer base and enhanced service offerings.

Assumptions

• Analysts are assuming ServiceNow's revenue will grow by 20.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 13.3% in 3 years time.
• Analysts expect earnings to reach $2.3 billion (and earnings per share of $10.64) by about August 2027, up from $1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.7 billion in earnings, and the most bearish expecting $1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 96.5x on those 2027 earnings, down from 140.3x today. This future PE is greater than the current PE for the US Software industry at 37.0x.
• Analysts expect the number of shares outstanding to grow by 0.78% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.61%, as per the Simply Wall St company report.

Risks

• High executive turnover and management changes could unsettle investors, potentially affecting stock price stability.
  
• Increased scrutiny on hiring practices and compliance could result in reputational damage, possibly impacting future revenue growth.
  
• Reliance on achieving higher sales through longer contract durations carries the risk of future volatility in revenue recognition and cash flows.
  
• Intense competition in the AI and cloud computing space may challenge ServiceNow's market share and pressure margins.
  
• Rapid expansion and product launches, such as RaptorDB, require significant investment; if returns do not materialize as expected, this could negatively impact net margins and earnings.

Valuation

• The analysts have a consensus price target of $869.87 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 $950.0, and the most bearish reporting a price target of just $640.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $17.2 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 96.5x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $781.27, the analyst's price target of $869.87 is 10.2% 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.