Given the broader market's recent volatility, many investors are hunting for oversold stocks. One name that has sold off aggressively over the last month and looks like an interesting opportunity to consider today is ServiceNow (NOW 2.05%). Not only has the digital workflow specialist recently completed a 5-for-1 stock split, making its shares more affordable, but it has also been a prominent beneficiary of enterprise investments in artificial intelligence (AI) -- and its revenue is surging.
Yet shares have been crushed, falling about 28% year to date.
Is this a buying opportunity, or are shares still too expensive to call the stock a buy today?
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Strong fourth-quarter results
The software provider's recent business growth has been exceptional. ServiceNow's fourth-quarter subscription revenue came in at $3.5 billion -- up 21% year over year.
Additionally, the company is proving it can translate top-line momentum into robust cash generation. Its non-generally accepted accounting principles (non-GAAP) free cash flow margin (free cash flow as a percent of sales) came in at an impressive 57% for the quarter. Further, ServiceNow's non-GAAP operating margin expanded 150 basis points year over year to 31%.
Underlying these figures is a clear acceleration in the company's AI-focused offerings. Management noted that its Now Assist products (the company's generative AI experience for its Now Platform) surpassed $600 million in annual contract value during the period. Additionally, the company's AI-focused control tower deal volume nearly tripled sequentially.
And its enterprise adoption metrics are compelling, too.
The company closed 244 transactions of $1 million or more in net new annual contract value during the quarter, representing a 40% year-over-year increase. Further, it ended the period with over 600 customers generating more than $5 million in annual contract value.
"Our Q4 results beat expectations handily," said CEO Bill McDermott during the company's fourth-quarter earnings call, "just like we have consistently for years now."
And things are looking promising going forward, too. The company's current remaining performance obligations (contract revenue to be recognized in the next 12 months) rose 25% year over year to $12.9 billion.
Looking ahead, management guided for first-quarter subscription revenue of $3.65 billion to $3.655 billion. This forecast implies about 21.5% year-over-year growth at the midpoint, demonstrating the company's persistently strong growth.
NYSE: NOW
Key Data Points
A fair valuation
On the surface, ServiceNow appears to be a compelling buy for growth investors. But the problem is that the market is already pricing in tremendous future success.
Trading at about 32 times earnings, investors are assuming near-perfect execution from here. In other words, a valuation like this prices in 20% top-line growth for the foreseeable future, despite an intensely competitive market that could lead to decelerating growth at some point.
But the stock has one more thing going for it worth calling out before we form an opinion. After spending nearly $600 million in Q4 alone buying back its stock, ServiceNow authorized a massive $5 billion share repurchase program in January and said it planned to immediately repurchase about $2 billion through an accelerated repurchase program. Not only will these share repurchases likely help shareholder returns over the long haul, but they also suggest management thinks its own stock is attractive.
Given its aggressive share repurchase program and strong business momentum, I think the ServiceNow shares are fairly valued. In other words, if I already owned the stock, I'd probably hold on, as long as the business continues to grow at rates similar to what it has been. But I'd ultimately like to see shares trade at a bigger discount before I consider buying into this growth story.
