ServiceNow, a cloud computing company specializing in digital workflow solutions, recently experienced an 11.5% plunge in its stock price. This decline followed a “lackluster outlook” for 2025 subscription growth, as reported by Bloomberg, which investors interpreted as a sign of potentially slower expansion, particularly in artificial intelligence (AI) sales. The stock market’s reaction underscores a common theme: publicly traded companies are under immense pressure to consistently exceed expectations and raise guidance to maintain investor confidence and stock value.
Bill McDermott, CEO of ServiceNow, at the Allen & Company Sun Valley Conference, highlighting the company’s prominent position in the tech industry.
ServiceNow’s Q4 2024 Performance: A Deep Dive
Despite the stock’s downturn, ServiceNow CEO Bill McDermott presented a contrasting view, emphasizing the company’s robust performance in the fourth quarter of 2024. In an interview on January 29, McDermott highlighted several key achievements:
- Subscription Revenue Beat: Q4 subscription revenues reached $2.866 billion, exceeding the previous year by 21% and surpassing guidance by 50 basis points.
- Strong Remaining Performance Obligations (RPO): Total RPO for Q4 stood at $22.3 billion, a substantial 26% increase year-over-year. Current RPO also exceeded guidance by 50 bps, reaching $10.27 billion, a 22% increase from the prior year.
- Earnings Per Share (EPS) Growth: Non-GAAP EPS for Q4 was $3.67, an 18% rise from the previous year and $0.02 above consensus estimates.
- High-Value Customer Acquisition: ServiceNow expanded its customer base with nearly 500 clients now generating over $5 million in annual contract value, marking a 21% annual growth in this segment.
McDermott underscored the magnitude of these results, stating, “2024 was a remarkable year of beats and raises. Q4 was the biggest quarter in our history.” He further pointed to margin improvements, with a 200 basis point increase in 2024 and a free cash flow margin of 47.5%, up from 31%. Earnings per share also saw a significant 29% increase, exceeding consensus expectations.
While acknowledging a “bold guidance” impacted by the strength of the U.S. dollar, McDermott expressed strong optimism about the future, particularly regarding the untapped potential of AI in the market.
AI and Pricing Strategy: Shaping ServiceNow’s Future
ServiceNow is strategically integrating generative AI into its service offerings, anticipating a significant market shift driven by this technology. The company is innovating with AI agents designed to handle complex tasks, such as travel planning and booking, as described in Brain Rush.
To facilitate wider adoption and capitalize on long-term usage, ServiceNow is also transitioning its generative AI pricing model towards a more flexible, pay-as-you-go approach. This strategic shift, while potentially forgoing immediate subscription revenue increases, is aimed at accelerating customer adoption and monetizing increased usage over time, according to Bloomberg.
Early indicators suggest a strong demand for ServiceNow’s AI-powered services. McDermott noted a “150% quarter on quarter agentic AI growth,” emphasizing the productivity gains within ServiceNow itself, citing “20% productivity increases in sales, customer service, human resources, and IT support” through internal use of their AI solutions.
The transformative potential of generative AI for businesses remains a key discussion point. While the definitive “killer app” for generative AI – one that demonstrably drives revenue growth exceeding investor expectations – is still emerging, ServiceNow appears to be positioning itself at the forefront of this evolution. McDermott highlighted a dramatic “16-fold” increase in go-to-market prospect conversion rates in the preceding six months, attributing this to AI-driven efficiencies. He elaborated on the role of chatbots in handling 80% of customer inquiries without human intervention and the AI-powered lead qualification process that focuses sales efforts on the top 20% of prospects, resulting in significant time savings and improved conversion rates.
Analyst Perspectives on ServiceNow Stock
Wall Street analysts present a moderately positive outlook for ServiceNow stock. TipRanks data, based on 29 analysts, suggests the stock is undervalued by approximately 4.5%, with an average 12-month price target of $1,194.48.
Some firms are even more bullish. Canaccord Genuity raised its price target to $1,275, citing ServiceNow’s strong profit margins, the momentum of its AI initiatives, and the potential upside from its new pricing model as AI adoption expands, as reported by Investing.com. Needham analysts offered an even higher target, increasing their price target by 25% to $1,500, while JMP Securities maintained a $1,300 target, according to Investing.com.
However, not all perspectives are uniformly optimistic. Vital Knowledge analyst Adam Crisafulli, as quoted by CNBC, cautioned that ServiceNow’s “significant” pricing structure change could pose risks to near-term financial results.
Conclusion: Is ServiceNow Stock a Buy?
The recent dip in ServiceNow stock price presents a potentially interesting entry point for investors. While concerns about the 2025 outlook and pricing model changes are valid, ServiceNow’s robust Q4 performance, strong position in the growing AI market, and positive analyst outlooks suggest a potential for future growth. If ServiceNow’s AI agents and new pricing strategy successfully accelerate revenue growth beyond current forecasts, the current stock price could indeed represent a valuable buying opportunity. Investors should closely monitor ServiceNow’s performance in the coming quarters to assess the impact of its AI strategy and pricing model on its financial results and market position.
