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ServiceNow Earnings: Generative AI Contributes Meaningfully to Growth While Profitability Shines

We’ve raised our fair value estimate of ServiceNow’s stock.

ServiceNow logo on office building.

Key Morningstar Metrics for ServiceNow

What We Thought of ServiceNow’s Earnings

ServiceNow NOW closed 2023 with a bang, delivering results ahead of guidance for both revenue and profitability for the fourth quarter, along with better-than-expected guidance. Our key takeaway was that the Pro Plus stock-keeping units, which include generative artificial intelligence, showed very strong demand since their September release and accounted for more net new annual contract value, or ACV, than any previous solution from the company.

Management was careful to note that macroeconomic conditions have not changed, despite a variety of positive indicators. Based on results and guidance, we have raised our estimates, particularly around profitability. We’ve lifted our fair value estimate to $770 per share from $640. Given the run in the shares since late October, we see the stock as fairly valued.

Total revenue grew 25.6% year over year as reported, including approximately 150-200 basis points of currency tailwind, to $2.437 billion, which was ahead of our model. Growth accelerated sequentially for the fourth straight quarter. Subscription revenue of $2.365 billion grew 27.2% year over year as reported, which was 50-100 basis points better than the high end of guidance.

Strength was driven by solid results across the board, including segments, products, and geographies. Customer workflows surpassed $1 billion in ACV during the quarter, up from $10 million just a few years ago. Management called out the public sector and telecom, media, and technology as notably strong.

Margin performance is impressive and supports our long-term outlook for continued margin expansion beyond management’s new 29% target for 2024. Non-GAAP operating margin was 29.4% for the quarter, compared with 28.0% last year and guidance of 27.5%, and was driven by spending discipline and revenue upside, in a similar way to last quarter.

ServiceNow Stock Price

Data as of Source: Morningstar Direct.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Dan Romanoff

Senior Equity Analyst
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Dan Romanoff, CPA, is a senior equity research analyst on the technology, media, and telecommunications team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers software.

Before Joining Morningstar in 2019, Romanoff spent 12 years in buy-side equity research covering the technology and telecommunications sectors, most recently at Holland Capital Management. Prior to that, he spent five years in sell-side equity research as an associate analyst at UBS and a senior analyst at Credit Suisse covering various areas within technology, including hardware, software, and semiconductors. Romanoff also has worked as an auditor and in valuation services for major public accounting firms.

Romanoff holds a bachelor’s degree in accountancy and a Master of Business Administration in finance, both from the University of Illinois at Urbana-Champaign. He also holds the Certified Public Accountant and Accredited in Business Valuation designations.

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