Morningstar

ServiceNow Earnings: Lowering Fair Value Estimate as Nuances Mar Guidance

We’re still waiting for AI-driven acceleration for the firm.

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Securities in This Article
ServiceNow Inc
(NOW)

Key Morningstar Metrics for ServiceNow

  • Fair Value Estimate
    : $100.00
  • Morningstar Rating
    : ★★★
  • Morningstar Economic Moat Rating
    : Narrow
  • Morningstar Uncertainty Rating
    : High

What We Thought of ServiceNow’s Earnings

ServiceNow’s NOW third-quarter revenue rose 20.5% to $4.1 billion, while adjusted earnings per share rose 4% and missed FactSet consensus by $0.02. Shares are down roughly 25% on the report.

Why it matters: The main issue was decelerating growth within guidance and difficulty understanding how AI is driving growth, given the implied deceleration. Combine that with fears of AI disruption for a high-multiple company, and you can get a violent selloff.

  • Specifically, the cRPO guide of 18.5% shows a deceleration from 20.0% in the current quarter, while management admitted they only passed “half” of the current quarter’s subscription revenue beat into the full-year guidance update, implying deceleration there as well.
  • Management explained this with multiple nuances, including increases in forward-deployed engineering services, which are classified as services revenue, and some early renewals that pulled cRPO into the current quarter. Even so, you’d rather have acceleration than “nuances.”

The bottom line: We are lowering our fair value for narrow moat ServiceNow to $100 per share from $165 after transferring coverage. Our explicit forecasts have not changed materially. Instead, our longer-term assumptions, which affect our implied multiple, have become more conservative.

  • Our updated fair value implies a 22 times forward non-GAAP P/E and 56 times GAAP. Our updated valuation implies revenue growth fades to the mid-single digits by the late 2030s into the 2040s. We could see upside or downside, depending on how disruptive or helpful AI is.
  • Our previous valuation implied that growth would likely stay in the double digits through 2045.

Long view: Management raised its AI ACV target to $1.7 billion by year-end from $1.5 billion previously and $1.0 billion before that, which implies some AI momentum. Management said they expect more AI momentum to show up directly in revenue in 2027, so that outlook will be especially important.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

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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