AI Mania Provides Quarterly Catalyst for ServiceNow Stock (NOW)
Elevate Your Investing Strategy:
Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence.
In fact, the cloud computing solutions innovator recorded its ninth consecutive earnings beat, making its quarterly earnings calls a bit of a repeat catalyst for the stock.
Concerns do linger, though. NOW's premium valuation and substantial stock-based compensation remain valid points of contention for bearish investors, which probably explains why NOW stock has given up most of its gains since last week. Given the rapid pace of AI growth—outpacing virtually every other sector—I'm firmly Bullish and believe ServiceNow still has room to run, even after a 21% gain over the past year.
AI Fuels a Revenue Boom
ServiceNow's Q2 revenue soared to $3.2 billion, a 22.5% YoY increase, outpacing last quarter's 18.6% growth and last year's 22.2% figure. The star of the show was, of course, AI, particularly the Now Assist platform, which saw a 50% quarter-over-quarter surge in Pro Plus deal counts. These deals, often multi-million-dollar contracts, leverage AI to simplify IT service management, customer service workflows, and HR processes.
For instance, a global bank recently adopted ServiceNow's AI to automate compliance reporting, slashing processing times and boosting accuracy. The company closed 89 deals over $1 million in net new annual contract value (ACV), with 11 exceeding $5 million, a testament to strong enterprise demand for its solutions.
This AI momentum also lifted current remaining performance obligations (cRPO) to $10.92 billion, up 25% YoY, beating guidance by 200 basis points. CEO Bill McDermott emphasized the edge of the company's agentic AI, which orchestrates complex, cross-departmental workflows—a capability that competitors struggle to match. As enterprises race to modernize, ServiceNow's ability to integrate AI with its workflow platform is driving stickiness and growth, positioning it as a leader in the $153 billion AI market, projected to grow at a 40.6% CAGR through 2028.
Efficiency Gains Through AI Innovation
Beyond revenue, I think it's exciting how AI is reshaping ServiceNow's cost structure. In Q2, its adjusted operating margin reached 29.5%, 250 basis points above guidance, thanks to AI-driven efficiencies. Tools like Now Assist automate repetitive tasks (these include anything from incident resolution to employee onboarding), freeing up resources and reducing costs.
Meanwhile, the company's RaptorDB platform further enhances efficiency by speeding up data processing. The platforms helped lift free cash flow margin to 16.5%, up 300 basis points YoY. Also, NOW's adjusted net income grew by 31% YoY to $854 million in Q2. As AI continues to refine operations, ServiceNow is building an increasingly profitable business.
All in all, the firm continues to demonstrate long-lasting revenue growth, as evidenced by the number of large customers it has attracted over the past five years. According to TipRanks data, NOW is now servicing over 2,000 large customers.
Valuation and SBC: A Premium Worth Paying?
Now, let's address the elephant in the room: ServiceNow's valuation. With a forward P/E ratio of 53x, NOW stock appears to be trading at a steep premium. Another concern I have is the company's stock-based compensation (SBC), which accounts for approximately 15% of revenue—a lofty figure for a company as mature as ServiceNow. This elevated SBC inflates free cash flow margins; therefore, investors should scrutinize the 16.5% FCF margin to gain a more accurate understanding of the cash picture. In fact, note that over the past 12 months, NOW has generated about $4 billion in free cash flow. However, the firm paid $1.85 billion in SBC, which continuously dilutes shareholders.
That said, the company's growth story makes a compelling case for its valuation. ServiceNow raised its full-year subscription revenue guidance to $12.775–$12.795 billion, which suggests 20% growth, while its 98% renewal rate underscores customer loyalty. With AI reshaping industries and ServiceNow apparently leading in agentic workflows, NOW's premium feels justified for those with a long-term view.
Consistent 'beat-and-raise' quarters and a strong competitive moat further bolster confidence. Just for context, ServiceNow's revenues have grown at a CAGR of 26% over the past five years, with little to no signs of slowdown recently, all while the scaling of the business drives even stronger earnings growth. Importantly, this trend is likely to persist at least in the medium term (and potentially even longer into the future, assuming AI's benefits start to compound).
Evidently, today, the consensus EPS estimates see a CAGR of 30% over the next five years. Thus, today's multiple should normalize relatively easily in the coming years, and so I don't expect a notable pullback, assuming a valuation compression takes place.
Is ServiceNow a Good Stock to Buy?
Currently, analysts are very bullish on NOW stock. The stock carries a Strong Buy consensus rating, based on 29 Buy, three Hold, and one Sell ratings assigned over the past three months. Today, NOW's average stock price target of $1,148.61 implies 18.5% upside potential over the next twelve months.
AI Boom Fuels NOW's Long-Term Investment Case
ServiceNow's latest results highlight the effectiveness of its AI-driven strategy, delivering strong growth and improving operational leverage. While its elevated valuation and significant stock-based compensation warrant attention, the company's steady execution, high customer retention, and expanding AI capabilities support a bullish long-term outlook.
As enterprises continue to embrace intelligent automation, ServiceNow is well-positioned to benefit from this secular shift. If its current momentum persists, the premium valuation may prove justified—making it a compelling contender in the future of enterprise software.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Business Insider
3 hours ago
- Business Insider
'PC Shipments are Forecast To Rise…,' Intel Stock (NASDAQ:INTC) Slips
Chip stock Intel (INTC) recently put up its earnings report, and one key point emerged that proved oddly welcome. As it turns out, Intel's work to help augment the artificial intelligence (AI) PC market has done Intel quite a bit of good. This serves as a bright spot for Intel, which is in desperate need of those as so much of the market seems to be turning on it. But shareholders were still clearly skeptical, and shares slipped modestly in Tuesday afternoon's trading. Elevate Your Investing Strategy: Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence. One of the biggest surprises to emerge from Intel's recent earnings report was the revelation that Intel is a major part of the AI PC market. In fact, three key PC makers—HP (HPQ), Lenovo (LNVGY), and Dell (DELL) —all turned to Intel for its line of Core Ultra processors that can handle AI operations. Given that those three firms represent around 66% of the global PC market, Intel may have landed a serious win. There was further help from Gartner Research Principal Rishi Padhi, who noted that PC shipments '…are forecast to rise 2.4% in 2025, propelled by a tariff-driven front-loaded inventory surge in the first half of 2025 in the U.S., and ongoing Windows 11 replacement cycles.' That is also good news for Intel. With foundry shipments up 4.4% on a year-over-year basis, there are some signs of a comeback in the making for Intel, though perhaps a slow one, and one not quite as pronounced as some might like. A Surprising Blow to Costa Rica Intel has been closing down operations worldwide, and one more such operation emerged recently. Intel announced plans to shut down chip assembly and test plant operations in Costa Rica, a move which will, somehow, '…drive greater efficiency and utilization within our global manufacturing network.' However, that is not the end of Intel in Costa Rica. Its engineering and corporate service positions will remain untouched, at least for now, reports note. Intel plans to absorb the losses by consolidating Assembly and Test Manufacturing (ATM) operations in Vietnam and Malaysia instead. Interestingly, some elements in Costa Rica moved quickly following the announcement. The Association of Free Zone Companies of Costa Rica (AZOFRAS) called on Costa Rican leaders to '…take swift action to safeguard national competitiveness,' one report noted. Is Intel a Buy, Hold or Sell? Turning to Wall Street, analysts have a Hold consensus rating on INTC stock based on one Buy, 25 Holds and three Sells assigned in the past three months, as indicated by the graphic below. After a 31.36% loss in its share price over the past year, the average INTC price target of $22.25 per share implies 8.75% upside potential.
Business Insider
3 hours ago
- Business Insider
Analysts Offer Insights on Consumer Cyclical Companies: Starbucks (SBUX) and Camping World Holdings (CWH)
Companies in the Consumer Cyclical sector have received a lot of coverage today as analysts weigh in on Starbucks (SBUX – Research Report) and Camping World Holdings (CWH – Research Report). Elevate Your Investing Strategy: Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence. Starbucks (SBUX) In a report released yesterday, Andrew Charles from TD Cowen maintained a Hold rating on Starbucks, with a price target of $95.00. The company's shares closed last Tuesday at $92.96. According to Charles is a 5-star analyst with an average return of 9.1% and a 54.2% success rate. Charles covers the NA sector, focusing on stocks such as Restaurant Brands International, First Watch Restaurant Group, and Darden Restaurants. The word on The Street in general, suggests a Moderate Buy analyst consensus rating for Starbucks with a $96.29 average price target, which is a 3.3% upside from current levels. In a report issued on July 14, Citi also maintained a Hold rating on the stock with a $100.00 price target. Camping World Holdings (CWH) Roth MKM analyst Scott Stember reiterated a Buy rating on Camping World Holdings yesterday and set a price target of $18.00. The company's shares closed last Tuesday at $17.64. According to Stember is a 4-star analyst with an average return of 8.8% and a 56.9% success rate. Stember covers the NA sector, focusing on stocks such as Standard Motor Products, Winnebago Industries, and Fox Factory Holding. The word on The Street in general, suggests a Strong Buy analyst consensus rating for Camping World Holdings with a $21.33 average price target.
Business Insider
3 hours ago
- Business Insider
Novo Nordisk Stock (NVO) Plunges 20% on Guidance Cut and CEO Appointment
Shares of Novo Nordisk (NVO) are down 20% after the European pharmaceutical giant lowered its full-year sales and profit guidance and announced a new CEO. Elevate Your Investing Strategy: Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence. The company said it now expects full-year sales growth of 8% to 14%, down from a previous target of 13% to 21%. In terms of profit, Novo Nordisk said that it expects annual growth of 10% to 16% versus the previously estimated target of 16% to 24%. Management said the outlook was being cut because of weaker growth expectations for its Wegovy weight-loss drug in the U.S. Novo Nordisk said it expects weaker sales of Wegovy and its Ozempic diabetes treatment in America during this year's second half. 'For Wegovy in the U.S., the sales outlook reflects the persistent use of compounded GLP-1s, slower-than-expected market expansion and competition,' said the company in a news release. New CEO The lowered guidance comes as Novo Nordisk struggles to keep pace with its U.S. rival Eli Lilly (LLY), the maker of competing obesity and diabetes drugs Mounjaro and Zepbound. This is the second time in recent months that Novo Nordisk has lowered its guidance. The company previously downgraded its 2025 outlook in May as it reported lower-than-expected first-quarter sales. At the same time, the Danish pharmaceutical company announced the appointment of Maziar Mike Doustdar, an internal candidate, as its new CEO. The new CEO appointment follows the surprise ousting of Lars Fruergaard Jørgensen in May of this year. The downwardly revised guidance and new CEO appointment come ahead of Novo Nordisk's second-quarter financial results that are scheduled to be released on Aug. 6. NVO stock is down 36% this year. Is NVO Stock a Buy? average NVO price target of $81.33 implies 48.20% upside from current levels.
