ServiceNow NOW has expanded its partnership with Microsoft MSFT to enhance front-office business processes using AI. The collaboration has integrated ServiceNow’s AI capabilities with Microsoft 365 Copilot, enabling streamlined workflows and self-service options within Microsoft apps like Teams.

Employees can now use Copilot to access ServiceNow’s knowledge base, request services via chat, and raise issues to live agents when required. ServiceNow’s Now Assist further eases tasks by providing smart, context-aware responses and suggestions based on organizational data from Microsoft 365 tools.

This partnership has strengthened NOW’s Generative AI (GenAI) portfolio with enhanced AI-driven workflow solutions focusing on modernizing employee and IT experiences and driving efficiency.

NOW Benefits From a Rich Partner Base

NOW’s expanding GenAI portfolio and rich partner base have been driving top-line growth. A strong partner base, which includes Five9 FIVN, Visa, Microsoft, NVIDIA NVDA, Zoom, Siemens, Rimini Street, IBM, Genesys, Fujitsu, Equinix, Boomi and Infosys, is strengthening ServiceNow’s AI capabilities.

NOW and Five9 recently expanded their partnership to deliver a turnkey AI-powered solution for unified end-to-end employee and customer experiences by combining ServiceNow Customer Service Management and the Five9 platform.

NOW’s prospects remain bright, with shares appreciating 44.6% year to date, outperforming the Zacks Computer & Technology sector and the Zacks Computers – IT Services industry’s returns of 27.7% and 13.5%, respectively.

ServiceNow shares are trading above the 50-day and 200-day moving averages, indicating a bullish trend.

NOW Trades Above 50-day & 200-day SMA

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Let us dig deeper to find out the factors driving NOW’s prospects.

YTD Performance

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ServiceNow Raises Subscription Revenue Guidance

For 2024, NOW expects subscription revenues of $10.655-$10.66 billion (up from previous guidance of $10.575-$10.585 billion), which suggests a rise of 23% from the 2023 actuals on a GAAP basis and 22.5% on a non-GAAP basis.

ServiceNow expects the non-GAAP subscription gross margin to be 84.5% and the non-GAAP operating margin to be 29.5%. The free cash flow margin is expected to be 31%.

For fourth-quarter 2024, subscription revenues are projected to be between $2.875 billion and $2.88 billion, suggesting a year-over-year improvement of 21.5%-22% on a GAAP basis. At constant currency, subscription revenues are expected to grow 20.5%.

Current Remaining Performance Obligation is expected to grow 21.5% year over year on both non-GAAP and GAAP basis.

ServiceNow expects a non-GAAP operating margin of 29% for the fourth quarter.

The Zacks Consensus Estimate for 2024 earnings is pegged at $13.87 per share, up 0.4% over the past 30 days, indicating a 28.66% year-over-year increase.

The consensus mark for 2024 revenues is pegged at $10.97 billion, suggesting growth of 22.33% over the 2023 reported figure.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

Strong Portfolio Aids NOW’s Prospects

ServiceNow is extensively leveraging AI and machine learning technologies to boost the potency of its solutions. NOW’s expanding GenAI capabilities are noteworthy, as its total addressable market is expected to hit $275 billion in 2026.

ServiceNow’s latest update, Xanadu, offers AI-powered, purpose-built industry solutions for domains, including telecom, media and technology, financial services and the public sector.

The Xanadu update adds the latest AI capabilities to boost customer agility, enhance productivity and improve employee experiences. It expands the GenAI portfolio to enterprise functions, including Security, and Sourcing & Procurement Operations.

NOW plans to integrate Agentic AI into the ServiceNow platform and unlock 24/7 productivity at a massive scale. The service has become available this month for Customer Service Management AI Agents and IT Service Management AI Agents. It aims to reduce the time to resolve an issue and make live agents more productive.

NOW has also expanded its partnership with NVIDIA to accelerate enterprise adoption of Agentic AI. Using NVIDIA NIM Agent Blueprints, the companies will co-develop native AI Agents on the ServiceNow platform, enabling businesses to easily activate AI-driven solutions.

Strong Liquidity Makes NOW Stock Attractive

A strong liquidity position, with a cash balance of $5.295 billion as of Sept. 30, 2024, is noteworthy. ServiceNow generated a free cash flow of $471 million in the third quarter of 2024.

NOW expects the free cash flow margin to be 31% for 2024.

The strong liquidity position allows ServiceNow to pursue various growth opportunities, including acquisitions and share repurchases.

In the third quarter of 2024, NOW repurchased roughly 272,000 shares for $225 million and had $562 million available for future share repurchases under the existing program.

NOW’s Strong Prospects Justify Premium Valuation

However, the NOW stock is not so cheap, as the Value Score of F suggests a stretched valuation at this moment.

In terms of the forward 12-month Price/Sales ratio, NOW is trading at 16.28, higher than its median of 13.74 and the sector’s 6.21.

Price/Sales Ratio (F12M)

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We believe that the strong growth prospect justifies ServiceNow’s premium valuation.

Conclusion

ServiceNow’s robust GenAI portfolio and strong partner base are expected to drive its clientele and boost subscription revenues. The Growth Score of B makes the stock attractive for growth-oriented investors.

ServiceNow currently has a Zacks Rank #2 (Buy), which implies that investors should start accumulating the stock right now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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