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

Wide-moat ServiceNow closed 2023 with a bang as it delivered results that came in ahead of guidance for both revenue and profitability for its fourth quarter, and provided better-than-expected guidance. Our key takeaway was that the Pro Plus stock-keeping units, or SKUs, which include generative artificial intelligence, showed very strong demand since their September release and accounted for more net new annual contract value, or ACV, in the first full quarter of availability than any other previous ServiceNow solution. 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 lift our fair value estimate to $770, from $640 previously. Given the run in the shares since late October, we see the stock as fairly valued.