ServiceNow (NOW +1.84%), which is best known for software that helps automate workflows, spoke about its new cybersecurity vertical like a real competitor on its second-quarter call recently.
Its security and risk franchise crossed $1 billion in annual contract value last year, and CEO Bill McDermott claims it's growing faster than the top cybersecurity companies. After having its cyber solutions included in 80% of the company's biggest deals, McDermott stated, "we're in the party now."
The stock has been hit hard over the past year as investors soured on SaaS (software-as-a-service) stocks. If artificial intelligence (AI) can run enterprise workflows, it's natural for investors to lose faith in the terminal value of an expensive software stock. That's the value assigned by the market after a company's explicit growth period ends, and it's how a stock can be crushed despite still posting solid quarterly numbers.
Even so, there are reasons to be optimistic about ServiceNow. Here's why.
Image source: Getty Images.
Palo Alto owns the sensors
One of the top industry players -- Palo Alto Networks (PANW +3.63%) -- recently proved that cybersecurity budgets are still expanding when it reported record results in June. Next-generation firewall bookings rose nearly 40%, the fastest pace for hardware in a decade, and its next-generation security annual recurring revenue grew 60% to $8.1 billion.
CEO Nikesh Arora declared the SaaSpocalypse for cyber "dead." Palo Alto's answer is a platform with 125 million sensors worldwide, capturing 17 petabytes of daily telemetry. At the same time, he cited false positive rates often reaching 25% and claimed that AI models "always fail at the last mile of complexity."
The map above the sensors
False alarm or not, someone still has to resolve the issue, and that's where ServiceNow's advantage lies. Palo Alto can contain the immediate threat. ServiceNow's "control tower" uses its diagram of how each enterprise runs to help the IT department patch the problem.
Companies and institutions expand over time, adding new business units that run on systems built years apart. This creates enough complexity for AI to become an agent of chaos without a reliable map. Trillions of transactions run on top of ServiceNow's proprietary configuration management database, connecting workflows.
Through recent acquisitions, the company has added device visibility and identity governance capabilities. While the two companies barely overlap today, and Palo Alto is a dominant incumbent, developing a risk and security business was a good move by ServiceNow's McDermott.
NYSE: NOW
Key Data Points
At roughly 24 times forward earnings, down from its five-year historical average of 50, the stock has room to run if ServiceNow improves enterprise AI outcomes. I expect the SaaSpocalypse fears to fade for the company as the complexity of running AI in the workplace becomes harder to dismiss.
