ServiceNow and Microsoft Join Forces to Transform Business Operations with AI

ServiceNow NOW is ramping up its collaboration with Microsoft MSFT, aiming to enhance front-office operations through artificial intelligence (AI). Their joint efforts include integrating ServiceNow’s AI features with Microsoft 365 Copilot, which will streamline workflows and improve self-service capabilities in Microsoft applications like Teams.

Now, employees can leverage Copilot to tap into ServiceNow’s knowledge repository, engage in service requests via chat, and escalate issues to live agents as needed. Additionally, ServiceNow’s Now Assist offers contextual responses and suggestions based on the organization’s data from Microsoft 365 tools, simplifying everyday tasks.

This partnership significantly bolsters NOW’s Generative AI (GenAI) offerings by introducing robust AI-driven workflow solutions designed to modernize workplace and IT experiences while boosting efficiency.

Advantages of a Strong Partnership Network

NOW’s growing portfolio in GenAI, backed by an extensive partner network, is a key driver of its revenue growth. This network includes major players like Five9 FIVN, Visa, Microsoft, NVIDIA NVDA, Zoom, Siemens, Rimini Street, IBM, Genesys, Fujitsu, Equinix, Boomi, and Infosys, enhancing ServiceNow’s AI capabilities.

Recently, NOW and Five9 have expanded their collaboration to deliver an AI-powered solution aimed at integrating employee and customer experiences by combining ServiceNow Customer Service Management with the Five9 platform.

The future looks promising for ServiceNow, with stock shares up 44.6% year-to-date, significantly outpacing the Zacks Computer & Technology sector and the Zacks Computers – IT Services industry, which have recorded gains of 27.7% and 13.5% respectively.

ServiceNow shares are currently trading above both the 50-day and 200-day moving averages, indicating a positive trend in the market.

Trading Above Moving Averages

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Now, let’s examine the factors contributing to NOW’s optimistic outlook.

Year-to-Date Performance

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ServiceNow Increases Subscription Revenue Forecast

For 2024, NOW anticipates subscription revenue between $10.655 billion and $10.66 billion, a rise from its earlier estimate of $10.575 billion to $10.585 billion. This projection reflects a 23% increase compared to 2023 results on a GAAP basis and 22.5% on a non-GAAP basis.

The company expects a non-GAAP subscription gross margin of 84.5% and a non-GAAP operating margin of 29.5%. Furthermore, the anticipated free cash flow margin stands at 31%.

Looking ahead to the fourth quarter of 2024, ServiceNow estimates subscription revenues to range between $2.875 billion and $2.88 billion, translating to a 21.5% to 22% year-over-year increase on a GAAP basis. When adjusted for constant currency, this figure suggests a growth of 20.5%.

The total Remaining Performance Obligation is projected to grow 21.5% year-over-year on both a non-GAAP and GAAP basis.

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

The Zacks Consensus Estimate for 2024 earnings stands at $13.87 per share, marking a 0.4% increase over the last month and a considerable 28.66% rise from the previous year.

ServiceNow, Inc. Price and Consensus

ServiceNow, Inc. price-consensus-chart | ServiceNow, Inc. Quote

The revenue consensus for 2024 is projected at $10.97 billion, suggesting an increase of 22.33% relative to the reported results from 2023.

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

Powerful Portfolio Boosts NOW’s Outlook

ServiceNow is harnessing AI and machine learning to enhance its solutions. Notably, the total addressable market for NOW’s GenAI capabilities is forecasted to reach $275 billion by 2026.

The recent Xanadu update introduces AI-powered solutions across various sectors, including telecommunications, finance, media, technology, and public services.

With this update, ServiceNow aims to foster customer adaptability, elevate productivity, and enrich employee experiences. Its GenAI offerings will also support functions such as Security and Sourcing & Procurement Operations.

To further integrate AI capabilities, NOW plans to incorporate Agentic AI into its platform, enabling continuous productivity. This capability launched recently for Customer Service Management AI Agents and IT Service Management AI Agents, aiming to expedite issue resolution and enhance agent productivity.

Moreover, NOW’s partnership with NVIDIA is intended to expedite the adoption of Agentic AI across enterprises. Utilizing NVIDIA NIM Agent Blueprints, the companies will co-create native AI Agents on the ServiceNow platform, facilitating the activation of AI-driven solutions for businesses.

Strong Liquidity Enhances Appeal of NOW Stock

As of September 30, 2024, ServiceNow holds a robust cash balance of $5.295 billion. Its free cash flow amounted to $471 million in the third quarter of 2024.

The projection for free cash flow margin in 2024 is set at 31%.

This solid liquidity positions ServiceNow to explore multiple growth avenues, including acquisitions and stock buybacks.

In the third quarter alone, NOW purchased about 272,000 shares for $225 million and has $562 million on hand for future buybacks as part of its existing program.

Strong Prospects Support High Valuation for NOW

Despite its promising prospects, NOW’s stock presents a higher valuation. A Value Score of F indicates a potentially inflated market price.

Currently, ServiceNow trades at a forward 12-month Price/Sales ratio of 16.28, eclipsing its median of 13.74 and the sector’s average of 6.21.

Price/Sales Ratio (F12M)