ServiceNow's (NOW 0.74%) stock has rallied more than 50% over the past three years as the S&P 500 advanced about 26%. The cloud software provider's shares suffered a steep decline in 2022 as the macro headwinds throttled its growth and compressed its valuations, but it bounced back in 2023 as it overcame some of those challenges.
So can ServiceNow's stock head even higher over the next three years? Let's review its business model, growth rates, and valuations to decide.
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What happened to ServiceNow over the past three years?
ServiceNow's cloud-based platform helps companies streamline their unstructured work patterns into automated workflows. That process allows them to expand more efficiently, reduce operating costs, and support hybrid and remote workers.
That business model is well insulated from macro headwinds, since economic downturns often drive companies to streamline their operations. That's why it suffered a milder slowdown than many of its peers over the past three years.
However, ServiceNow's growth in adjusted revenue and current remaining performance obligations (cRPO) -- or the remaining value of its current contracts that it expects to recognize as revenue over the following 12 months -- still decelerated as it became harder to lock in longer-term and higher-value contracts.
On the bright side, its adjusted subscription gross margin and free-cash-flow (FCF) margin held steady -- indicating it still has plenty of pricing power -- as its growth in adjusted earnings per share (EPS) accelerated.
|
Metric |
2021 |
2022 |
2023 |
|---|---|---|---|
|
Adjusted revenue growth |
29% |
28% |
23.5% |
|
cRPO growth |
32% |
25.5% |
23% |
|
Adjusted subscription gross margin |
85% |
86% |
85% |
|
FCF margin |
32% |
30% |
30% |
|
Adjusted EPS growth |
28% |
28% |
42% |
Data source: ServiceNow.
What will happen to ServiceNow over the next three years?
For 2024, the company expects its subscription revenue (which accounts for most of its top line) to rise 21.5% on a constant currency basis, its subscription gross margin to dip slightly to 84.5%, and its FCF margin to expand to 31%. Analysts expect its reported revenue and adjusted EPS to increase 21% and 25%, respectively.
ServiceNow expects that robust increase to be driven by its growth across the federal sector and the expansion of its Now Assist AI platform, which uses generative AI tools to optimize its digital workflows. During the company's latest conference call in April, CEO Bill McDermott called AI a "catalyst for business transformation."
For 2025, analysts expect revenue and adjusted EPS to grow 21% and 20%, respectively. For 2026, the company has set a goal for generating at least $15 billion in subscription revenue -- which would represent a compound annual growth rate (CAGR) of more than 20% from 2023. So for now, we can assume that ServiceNow can continue to grow its top and bottom lines at a CAGR of more than 20% through 2026.
By comparison, analysts expect Salesforce, which competes against ServiceNow with its Service Cloud, to grow its revenue at a CAGR of only 9% over the next three fiscal years. Atlassian, which competes against ServiceNow with its Jira Service Management platform, is expecting its top line to have a three-year CAGR of 21%.
Where will ServiceNow's stock be in three years?
ServiceNow is still growing at an impressive rate, but its stock isn't cheap at 52 times forward earnings. Salesforce and Atlassian trade at 24 and 50 times forward earnings, respectively. It's not terribly overvalued, but it needs to consistently beat Wall Street's expectations to maintain its premium valuation.
Assuming ServiceNow still trades at 50 times forward earnings and grows its adjusted EPS at a CAGR of 20% from 2024 to 2027, its stock price could rise 33% to the low $930s. That wouldn't be as impressive as its gains over the past three years, but it has a decent shot at outperforming the S&P 500's average annual return of about 10%.
