ServiceNow (NOW) $156

Industry/Sector/Type - Enterprise Software/ SaaS/Secular growth trending lower with size.

Biggest catalyst for the stock - The valuation has become somewhat more reasonable at 10x sales, from a very high 16x sales based on lofty expectations of over 22-25% revenue growth, which has now inflecting lower to high teens growth with improving profitability. I would have preferred to buy it at $135-$140, around 8X sales but that price was around it's April 2025 low and I don’t see the stock returning there in a hurry. One could start accumulating in installments now.

Positives

An exceptional business model with best of breed tech with robust, sustainable recurring revenue. Its integrated business model, which started with IT operations and services, has allowed it to move into CRM, HR, and Finance.

ServiceNow’s key selling point is cutting the maze-like menus and clunky legacy interfaces of legacy tech providers to improve user experiences for the entire company, which give it a high 97% retention rate.

The Software as a service Sector (SaaS) is coming off a bruising year, with several tech companies unable to beat the index because of lower growth, which has resulted in lower multiples. I didn’t do well in Confluent (CFLT), and Klaviyo (KVYO), as two examples. Similarly, ServiceNow's stock also underperformed at -28% for the year, as the market reset multiples from companies inflecting lower to low twenties growth from the mid-thirties. As a result, companies quoting 12-14x revenues fell to 8-10x revenues.

Now at these lower multiples, one could buy them for 14-16% targeted annual gains.

Further, ServiceNow's Q3 FY25 beat estimates with strong enterprise customer momentum in high volume brackets. It has guided to continued RPO growth, and better margins.

Negatives

For a $14Bn high revenue behemoth, which is the largest in its sub sector, the operating margins and cash flow margins are low at 15% and 24% respectively.

With a strong emphasis on AI and ServiceNow claiming a leading technology edge, low margins suggest pricing pressure or not enough operating leverage, or perhaps the tighter budgets that we have seen in the past 1-2 years continue to be a problem. ServiceNow will have to perform better to get a higher earning multiple - robust sales won’t be enough.

The potential $7B Armis acquisition should be challenging and needs to be executed well for its AI platform ambitions.

Return

1 Year -28% 5 Year 41% 10 Year 793%

Valuation

Three years forward.

P/S 10.2 Sales Growth 17.8% P/S Growth 0.57

P/E 37.8 Earnings Growth 16.17 PEG 2.3 This needs to come down!

Cash Flow Margin 24%

Operating Margin 15%