ServiceNow, a leading cloud and artificial intelligence (AI) software provider, recently unveiled its ambitious plan to scale its subscription business from $8.5 billion to over $15 billion by 2026. This announcement comes at a time when AI is increasingly becoming a significant driver of business growth.
Despite the promising outlook, ServiceNow’s stock has surged by 60% in the past year, reflecting much of the expected growth in the coming years. This begs the question – is investing in this top AI software stock still a smart move?
In the first quarter of 2024, ServiceNow reported a 25% year-over-year increase in total subscription revenue, reaching $2.52 billion. While the company maintained its full-year revenue guidance, indicating growth of about 22% for 2024, investors are eagerly awaiting the impact of AI on its financial performance.
ServiceNow offers enterprise software for IT, customer service, and workflow management. A notable partnership with Nvidia entails using ServiceNow’s solutions for AI research and development, with the promise of integrating Nvidia’s advancements into ServiceNow’s offerings.
Despite these advancements, ServiceNow’s stock dipped following its Q1 update, suggesting that investors are still waiting to see the revenue benefits of its AI initiatives. The company continues to introduce new software tools, such as StarCoder2, co-developed with Nvidia and Hugging Face, in a bid to sustain its growth momentum.
While the focus on AI is pivotal, the rationale behind owning ServiceNow stock extends beyond growth. The company aims to enhance profit margins and earnings per share (EPS) as it scales. By reducing employee stock-based compensation and repurchasing shares, ServiceNow aims to bolster its financial performance.
With a strong balance sheet, ServiceNow is well-positioned for future growth, boasting $5.1 billion in cash and short-term investments and manageable debt. However, the stock’s valuation remains a concern, trading at 74 times trailing-12-month GAAP EPS.
Investors who are intrigued by ServiceNow’s growth potential can consider a dollar-cost averaging strategy to gradually build a position. While the company’s AI prospects are promising, the high valuation underscores the importance of cautious investing.
In conclusion, while ServiceNow stands out as a top AI stock, investors should weigh the valuation against the growth opportunities. A prudent, long-term approach may be advisable for those considering investing in this cloud and AI software leader.
