Key Points
ServiceNow reported solid Q3 growth, but didn't beat expectations by the same margin to which investors have become accustomed.
The stock looks like a streaming long-term buy on the pullback.
ServiceNow (NYSE: NOW) shares tumbled 27% after the company's third-quarter earnings report renewed fears that its business could be disrupted by artificial intelligence (AI). However, with revenue growing by more than 20% and the company raising guidance, the plunge in the stock price appears to be an extreme overreaction.
The stock is now down 31% on the year. Let's take a closer look at its Q3 results and prospects to see why I think the stock looks like a buy on this dip.
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Investor panic
The investor panic in ServiceNow's stock largely centers around the software-as-a-service (SaaS) stock reporting a smaller-than-typical quarterly earnings beat and issuing less robust guidance than expected. However, the results were ultimately solid in a vacuum.
The company's overall revenue grew a robust 20.5% to $4.11 billion, while its adjusted earnings per share (EPS) rose 5% to $1. Analysts, meanwhile, were looking for EPS of $1.02 on revenue of $4.1 billion, as compiled by LSEG.
ServiceNow's closely watched subscription revenue climbed 21%, or 20.5% on a constant currency basis, to $3.99 billion. That was above the 20% constant currency subscription revenue growth it had guided for earlier, but it has a history of larger beats. Professional services revenue, meanwhile, rose 10% to $118 million.
While investors fret about the impact of AI on ServiceNow's business, AI remains a driver. Its AI annual contract value (ACV) soared 65% year over year, and it raised its year-end target to $1.7 billion, up from $1.5 billion. Agentic AI consumption, meanwhile, soared 13 times year over year. Its Superintelligence Control Tower, which is its AI orchestration tool, saw a 500% month-to-month surge in activated AI actions.
The company also announced that it has expanded its partnership with OpenAI. OpenAI will incorporate more of its models and AI agents into ServiceNow products and connect ServiceNow workflows with ChatGPT. It plans to develop security and risk solutions powered by OpenAI cyber models, further strengthening its position in cybersecurity. Management called ServiceNow the fastest-growing cybersecurity company at scale, and this remains a major focus.
The company also highlighted its internal use of AI. It said that it has seen more than $1 billion in annual efficiency gains from its own use of AI.
Another closely watched SaaS metric is remaining performance obligations (RPO), which is deferred revenue plus backlog growth, as it can indicate future revenue growth. In the quarter, ServiceNow saw its RPO increase by 22.5% to $29.7 billion, while current RPO (cRPO) jumped by 21% to $13.65 billion.
Looking ahead, the company forecast its fourth-quarter subscription revenue to grow by 22.5% to 23%, or by 21.5% on a constant-currency basis, to a range of $4.245 billion to $4.255 billion. It anticipates cRPO to increase by 18.5%. For the full year, the company raised its subscription revenue guidance to a range of $15.78 billion and $15.79 billion, representing growth of 22.5%, or 21% in constant currency. That was up slightly from prior revenue guidance of $15.76 billion and $15.78 billion.
Image source: The Motley Fool.
Time to buy the dip
Trading at a forward price-to-sales (P/S) multiple of 6 based on 2027 analyst estimates and a forward price-to-earnings (P/E) of just above 22 times, ServiceNow's stock has pulled back to some highly attractive valuations for a SaaS company that continues to grow its high-margin subscription revenue 20% or more.
With one of the most deeply ingrained software platforms, the risk of AI disruption is not only low, in my view, but the company is well positioned to be an AI winner. ServiceNow is seeing strong AI growth, and Control Tower has the potential to be one of the most important AI products for agentic AI orchestration.
For new investors, I might see this pullback as a gift to buy the stock.
Geoffrey Seiler has positions in ServiceNow. The Motley Fool has positions in and recommends ServiceNow. The Motley Fool has a disclosure policy.