Shares of cloud software maker ServiceNow Inc. (NYSE: NOW) have risen more than 68% in the past 12 months. That price likely already reflects investors’ high expectations for growth in ServiceNow’s promising software. Does the stock have room to grow even further?
Earlier this month, ServiceNow’s management unveiled its plan to grow its AI-powered cloud software. The company aims to scale its subscription business from $8.5 billion annually to more than $15 billion by 2026. In the first quarter of this year, ServiceNow’s total subscription revenue was $2.52 billion, up 25% year-on-year. Management kept its full-year 2024 revenue forecast essentially unchanged, slightly raising the low end of its expected subscription revenue from $10.56 billion to $10.575 billion. That implies annual growth of about 22%.
ServiceNow produces enterprise software for customer service and managing various workflows. In the spring, the company signed an agreement with Nvidia, according to which the graphics card manufacturer will use ServiceNow’s offerings for research and development in the field of generative artificial intelligence. In turn, the results of Nvidia’s research and development in the field of artificial intelligence will be implemented in ServiceNow’s software solutions. However, it will take a long time before the joint development of both companies can provide specific financial results.
ServiceNow expects to continue growing through new software, such as a second-generation code generation tool called StarCoder2, developed in partnership with Nvidia and private AI startup Hugging Face.
ServiceNow is also making a turnaround in revenue and earnings per share growth. The company expects its free cash flow (FCF) margin to rise to 31% this year (up from about 30% last year). ServiceNow had $5.1 billion in cash and short-term investments at the end of March, and debt was just under $1.5 billion. Thus, ServiceNow’s success depends on the company’s ability to grow its portfolio and optimize profits, so investors should watch the company’s sales momentum as well as its outstanding shares.
NOW shares traded at $726.56 on May 6.
