The software-as-a-service (SaaS) sector has been in the dumps, and right now, these companies can do no right in the eyes of investors. ServiceNow (NOW +0.03%) became the latest example of this, with its shares plunging despite reporting strong fourth-quarter results and issuing upbeat guidance.
NYSE: NOW
Key Data Points
Strong growth continues
ServiceNow is pivoting to be an artificial intelligence (AI) first company, and its generative AI suite of solutions, Now Assist, continues to be a growth driver, reaching a $600 million annual contract value (ACV). It will look to grow to over $1 billion by the end of 2026. Meanwhile, it is in the process of acquiring AI cybersecurity companies Armis and Veza to help tie security and AI capabilities together. With its AI Control Tower platform, it is also looking to become an orchestration platform for agentic AI.
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For Q4, ServiceNow's revenue rose 20.5% year over year to $3.57 billion, while adjusted earnings per share (EPS) jumped 26% to $0.92. That bested the analyst consensus, which was looking for EPS of $0.88 on revenue of $3.53 billion, as compiled by the LSEG. Subscription revenue climbed 21% year over year to $3.47 billion, while professional services revenue rose 13% to $102 million.
Another popular SaaS metric is remaining performance obligations (RPO), which is deferred revenue plus backlog growth. This measure is closely watched, as it can be an indicator of future revenue growth. In the quarter, the company saw RPO increase by 26.5% to $28.2 billion, while current RPO (cRPO) rose by 25% to $12.85 billion.
Looking ahead, the company forecast its Q1 subscription revenue to grow 21.5% to a range of $3.650 billion to $3.655 billion. It anticipates cRPO to increase by 22.5%. For the full year, it projected subscription revenue of between $15.53 billion and $15.57 billion, representing growth of 20.5% to 21%.
Should investors buy the stock on the dip?
ServiceNow is showing no signs that AI is negatively impacting its business, and its CEO specifically said on the company's earnings call that AI will not "replace enterprise orchestration" and that it is a huge opportunity. The company's unified data system and structured workflows, meanwhile, should make it an ideal environment for AI and a launchpad for AI agents. At this point, the business is performing well, but the stock is not. However, the opportunity is still there.
Following its drop, the stock now trades at a forward price-to-sales multiple of 7.5 based on 2026 analyst estimates and a forward price-to-earnings (P/E) ratio of just above 28. Given its growth and prospects, that's an attractive valuation. As such, I'd be a buyer of the stock on this dip.
