What Happened?
Shares of enterprise workflow software maker ServiceNow (NYSE:NOW) fell 13% in the morning session after the company reported fourth quarter results: With shares up roughly 20% in the last three months (before this print) and the stock making a 52-week high just earlier this week, the market was pricing in good news for ServiceNow. With that said, roughly in line subscription revenue and total revenue this quarter did not meet heightened expectations. Additionally, RPO (remaining performance obligations, a key leading indicator of revenue), missed Wall Street's expectations by roughly 2%, although the 23% year on year growth was certainly healthy for a company of this scale. Moving down the income statement, adjusted operating margin of 29.5% beat expectations very slightly.
Looking ahead, ServiceNow guided to Q1 subscription revenue of roughly $3.0 billion, in line with Wall Street's expectations. Adjusted operating margin of 30% is expected in Q1, again in line with expectations.
A top priority for ServiceNow continues to be AI. Recent developments include AI Agent Orchestrator, which connects teams of AI agents working across tasks, systems, and departments to maximize efficiency. AI Agent Studio is a low code/no-code tool allowing businesses to build fully-customized AI agents. AI Agents is a product featuring ready-to-deploy agents designed for every workflow across IT, customer service, HR, and more.
Overall ServiceNow reported Q4 2024 results and gave Q1 2025 guidance that was largely in line with expectations. Said differently, the business is tracking, with healthy, profitable growth. However, the valuation and recent run-up in the stock tell us that expectations were high heading into the print. It is therefore no surprise that the stock traded down.
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What The Market Is Telling Us
ServiceNow’s shares are not very volatile and have only had 5 moves greater than 5% over the last year. Moves this big are rare for ServiceNow and indicate this news significantly impacted the market’s perception of the business.
The biggest move we wrote about over the last year was 6 months ago when the stock gained 14.1% on the news that the company reported an impressive "beat and raise" quarter, which was powered by what management considered "elite-level execution." ServiceNow beat on the RPO (remaining performance obligations, a proxy for future revenues) line. Improvement in new large contract wins this quarter was another plus. Adjusted operating income also beat by a meaningful amount, and the company slightly raised its full-year guidance for subscription revenue and operating margin.
Moving on to its AI capabilities, management provided promising insights. NowAssist (AI product) net new ACV doubled quarter-over-quarter and became the fastest-growing new product in the company's history. Notably, the company inked 11 NowAssist deals with $1 million+ ACV in Q2, two of which were over $5 million. Also, the company noted that Dell would be integrating NowAssist. Alongside similar deals, this could significantly accelerate ServiceNow's reach in the AI automation space.
Overall, this was a strong quarter with the company's improved visibility in its deal pipeline providing strong conviction in its near term forecasts. Alongside its AI momentum, investors have ample reasons to stay positive.
ServiceNow is down 5.7% since the beginning of the year, and at $994.73 per share, it is trading 15% below its 52-week high of $1,170 from January 2025. Investors who bought $1,000 worth of ServiceNow’s shares 5 years ago would now be looking at an investment worth $2,911.
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