The stock market imposes a pitiless logic: Unless a public company exceeds investor expectations and raises guidance each quarter, the company’s stock price falls.
Thus it comes as no surprise to see an 11.5% decline in the share price of ServiceNow – the Santa Clara, Calif.-based provider of applications that help companies organize and automate their personnel and information technology operations, according to Bloomberg.
ServiceNow’s stock drop comes in the wake of a “lackluster outlook” for 2025 subscription growth on a slower artificial intelligence sales bump,” Bloomberg noted.
ServiceNow is jubilant about the company’s performance. “The numbers – you know they’re great,” CEO Bill McDermott told me in a January 29 interview.
“2024 was a remarkable year of beats and raises. Q4 was the biggest quarter in our history. Subs beat by 50 basis points. CRPO beat and raised. Margins were up 200 bp in 2024 and our free cash flow margin was 47.8% up from 31%. And we made money with earnings per share up 29% – beating consensus,” he added.
ServiceNow envisions a bright future. “We offered bold guidance that was impacted by the strength of the U.S. dollar,” McDermott explained. “We’ve talked about the speed of AI. I truly believe the upside of the market has not even been comprehended!” he added in a January 29 email.
The post-earnings drop in ServiceNow’s stock could be a buying opportunity as some analysts see demand for the company’s AI-infused services as a sign of faster growth ahead.
ServiceNow’s Fourth Quarter Performance And Prospects
ServiceNow’s results for the fourth quarter were strong and the company forecast slightly slower 19% revenue growth in 2025. Nevertheless, company executives envisioned significant upside due to the “shakeup caused by artificial intelligence,” according to the Wall Street Journal.
The key numbers are as follows:
- Fourth quarter subscription revenues: $2.866 billion – 21% more than the previous year and 50 bps above the high end of the company’s guidance range, according to a spokesperson email.
- Q4 remaining performance obligations: $22.3 billion – a 26% increase from the previous year, the company noted.
- Q4 current remaining performance obligations: $10.27 billion – 22% more than the previous year and 50 bps more than guidance, according to the company.
- Q4 non-GAAP earnings per share: $3.67 – up 18% from last year and two cents more than the consensus estimate, the company said.
- Q4 customers generating over $5 million in annual contract value: nearly 500 – representing 21% annual growth, noted the company.
- 2025 subscription revenue forecast: $12.7 billion – roughly $200 million short of the Wall Street consensus, according to Bloomberg.
ServiceNow is incorporating generative AI into its products and is changing its pricing approach. The company is focusing on AI agents – which handle complex tasks such as planning a vacation and booking tickets, hotels, and restaurants, according to my book, Brain Rush.
ServiceNow is also changing its generative AI pricing model – using more pay-as-you-go pricing. The change will mean “forgoing upfront incremental new subscriptions to instead drive accelerated adoption and monetize increasing usage over time,” the company told Bloomberg.
Demand for ServiceNow’s agentic AI services is increasing. “We have experienced 150% quarter on quarter agentic AI growth,” McDermott told me. “We drink our own champagne. It gives us 20% productivity increases in sales, customer service, human resources, and IT support,” he added.
While companies are still looking for a killer app for generative AI – which in my view would happen if generative AI could help a company grow revenue faster than investors expect – ServiceNow could be on the cusp of making that vision a reality.
That’s because the company says generative AI is helping the company turn prospective customers into buyers far more efficiently. “In the last six months alone our go to market prospect conversion rate has increased 16-fold,” McDermott told me.
“Our chatbots handle 80% of the customers who don’t need a person. We give our sales people the highest potential 20% of the leads. This saves 200,000 hours of salespeople’s time and enables sixteen times better conversion of top prospects to deals,” he added.
Where ServiceNow Stock Goes Next
Wall Street is modestly optimistic about ServiceNow stock. Based on 29 Wall Street analysts offering 12-month price targets, the company’s shares are 4.5% under-valued given their average target of $1,194.48, according to TipRanks.
Yet some analysts are more bullish.
Canaccord Genuity raised its price target for the company to $1,275. After ServiceNow’s recent earnings call and follow-up discussions with management, the firm views the company’s position as strong.
ServiceNow’s high profit margin, “the acceleration of its AI and Agentic initiatives, and the potential for the pricing model to capture additional upside as AI adoption increases,” all strengthen ServiceNow’s growth prospects,” noted Canaccord Genuity analyst Richard Davis, according to Investing.com.
Various other analysts are bullish. Needham analysts raised their price target for ServiceNow by 25% to $1,500 while JMP Securities maintained a price target of $1,300, Investing.com noted.
Not all analysts were so optimistic. ServiceNow’s “significant” pricing structure change could hurt results, Vital Knowledge analyst Adam Crisafulli told CNBC.
If ServiceNow’s AI agents and new pricing strategy result in faster-than-expected revenue growth, today’s stock price drop could ultimately be a good buying opportunity.
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