A recent survey from Morgan Stanley identified artificial intelligence (AI) as the IT product category likely to see the largest spending increase in 2024. Despite that enthusiasm, businesses have only started to reap the benefits of what could be the most transformative technology in years.
Indeed, billionaire hedge fund manager Dan Loeb recently compared AI to the Industrial Revolution, and he wrote the following in a note to clients:
We have watched AI evolve and believe the technology has matured to the point that it is driving a transformational technology platform shift similar to those seen roughly once per decade: the personal computer in the 1980s, internet in the 1990s, mobile in the 2000s, and cloud in the 2010s.
That puts investors in front of a colossal opportunity, and the most prudent way to benefit is to own a basket of AI stocks. Here's why ServiceNow (NOW 1.02%) belongs in such a basket.
ServiceNow is a leader in several IT software markets
ServiceNow specializes in digital workflow management. Its platform addresses four primary use cases: technology workflows like IT service, employee workflows like human resources, customer workflows like customer service, and creator workflows like application development and workflow automation. Its platform integrates products from vendors like Microsoft and Salesforce to help businesses unify and digitize workflows across disparate systems.
ServiceNow is the market leader in IT service management, IT operations management, and artificial intelligence (AI) for IT operations software, according to consultancy Gartner. The company is also a leader in low-code application development, digital process automation, and risk management platforms, according to Forrester Research. Those accolades tell investors that the company is doing something right, and they tell prospective customers that ServiceNow is worth consideration.
With that in mind, ServiceNow reported solid financial results in Q4. Revenue increased 26% to $2.4 billion, marking the fourth straight quarter of sequential acceleration, and non-GAAP net income jumped 36% to $3.11 per diluted share. The company also notched a renewal rate of 99% in Q4, up from 98% last year, indicating high customer satisfaction.
The chart below shows quarterly revenue growth over the last two years.
ServiceNow's quarterly revenue growth in the last two years.
ServiceNow was quick to capitalize on generative AI
ServiceNow has been building AI into its platform for years, including virtual agent technology, predictive insights, intelligent search, and routine task automation. However, the company was quick to capitalize on the demand for generative AI. In fact, ServiceNow was one of the first software vendors to make generative AI available to its customers when it introduced Now Assist last September. That rapid product development has already been a tailwind, as evidenced by accelerating revenue growth and strong customer retention.
Now Assist is a digital copilot that automates interactions and summarizes information for IT service, field service, customer service, and human resources teams. It can also turn natural language into computer code to help software developers build products more quickly. Now Assist drove the highest number of customer requests for a pre-release product in company history, according to CEO Bill McDermott.
Additionally, ServiceNow recently expanded its partnership with Nvidia to introduce generative AI solutions purpose-built for telecommunications companies, an industry where automation is in high demand. Management says the new tools will help businesses provide better customer care and realize cost savings through greater productivity.
Suffice it to say ServiceNow is leaning into AI, and the company sees itself as well positioned to benefit as businesses ramp up investment in that area. McDermott offered the following insight on the most recent earnings call:
We are, in fact, in a new era of business transformation powered by AI. This is unlocking massive opportunities in the enterprise software industry. And ServiceNow is extremely well positioned not only to lead this movement, but to define it.
ServiceNow shares trade at a reasonable valuation
ServiceNow has hardly tapped its $220 billion addressable market, and it sits at the intersection of two major trends: workflow digitization and artificial intelligence. The company has a strong presence in several software markets, and its tremendous capacity for innovation is creating new monetization opportunities. ServiceNow has nearly doubled the number of major products on its platform since 2020.
That leaves the company well-positioned for future growth. Indeed, ServiceNow placed No. 19 on the Fortune Future 50 list in 2023, an annual ranking of the world's largest companies based on their long-term growth prospects. And Wall Street analysts expect 20% annual sales growth over the next five years.
With that in mind, its current valuation of 17.8 times sales appears reasonable, despite being a slight premium to the three-year average of 16.9 times sales. Investors should feel comfortable buying a small position in this stock today, especially as part of a basket of AI stocks.
