ServiceNow stock has risen 33% so far this year. Following the company’s third quarter report, shares of the Santa Clara, Calif.-based cloud software platform provider are up 4% in early October 24 trading.
I see three reasons the company’s shares could rise further:
- Expectations-beating growth and profitability;
- ServiceNow’s enterprise generative AI leadership; and
- Early-adopters of ServiceNow’s AI achieving big productivity increases.
ServiceNow’s Third Quarter Report
ServiceNow’s latest financial report for the third quarter ending September 30 exceeded investor expectations.
The company’s software tracks and manages IT department services, enables employees to access administrative and workflow tools, and helps manage customer service and security.
We “had another exceptional ‘beat and raise’ quarter, once again outperforming across all topline growth and profitability metrics in Q3,” noted a ServiceNow release.
“The company is executing on its mission to put AI to work for customers. In Q3, Now Assist AI continued to be the company’s fastest growing product ever, as well as an accelerant to its cross-enterprise expansion.”
Here are the key numbers:
- Q3 2024 revenue: $2.80 billion — up 22.3% and $60 million ahead of the Street consensus, according to Zacks.
- Q3 2024 adjusted earnings per share: $3.72 — up 27% and 80 cents above estimates, Zacks noted.
- Q3 2024 subscription revenue: $2.72 billion — up 22.5% — around $60 million above consensus, Zacks reported.
- Q3 2024 current remaining performance obligations: $9.36 billion — representing 26% growth and $250 million more than analysts’ projections, Investor’s Business Daily reported
- Q4 2024 subscription revenue forecast: a range of $2.875 billion to $2.880 billion — the midpoint of which is 22% above the previous year’s result, according to Zacks.
- Q4 2024 CRPO growth forecast: 21.5%, according to IBD.
While shares fell immediately after the earnings announcement, they were higher before the bell on October 24. The initial drop may have been due to the company’s conservative forecast. This bookings guidance was effectively “good, but not great,” Kirk Materne, an analyst at Evercore ISI, said in a note featured in a Bloomberg report.
ServiceNow’s Leadership In Enterprise Generative AI
While companies are expected to continue to make huge investments in generative AI, the technology’s payoff has been elusive. As I noted in my Value Pyramid case study, most generative AI use cases help people overcome creator’s block — such as the anxiety about writing an email.
Fewer generative AI applications help improve the productivity of business functions such as customer service or coding. And few, if any, applications of AI chatbots enable companies to add new sources of revenue.
ServiceNow appears to be delivering generative AI in ways that boost productivity. “I’m really excited because we’re taking on the world’s biggest challenges,” McDermott told me. The company’s main generative AI assistant product, Now Assist, is the fastest-growing in company history.”
He expressed pride in the company’s partnership with Nvidia. Nvidia CEO Jensen Huang said ServiceNow provides the “AI operating system for the enterprise,” McDermott told me.
ServiceNow customers are enjoying considerable increases in weekly productivity as the company’s software performs more of workers’ mundane tasks. “Now Assist is increasing human productivity a day-and-a-half. I think we can increase human productivity at a level of three or four days a week,” he said.
“So companies are going to be able to decide, ‘Do I go for growth? Invent new use cases? Solve new customer problems and grow again?’ And I think we can lift the whole GDP of the world economy,” he added.
ServiceNow is beginning to make available so-called agentic AI to its enterprise customers. These systems perform tasks such as checking a car rental reservation at the airport or ranking potential sales leads, according to my October Forbes post.
ServiceNow says it has an advantage over agentic AI rivals. “Through our partnerships with Nvidia, Snowflake, and Databricks, we have a first mover advantage,” McDermott explained. “We have governance built into the platform. The big thing is we are putting AI to work for the people. We are making reams of data available to the call center agent.”
ServiceNow is also introducing a zero copy capability in the company’s Workflow Data Fabric solution which could reduce demand for customer and human resources relationship management systems from vendors such as Salesforce and Workday.
“We can copy any workflow without replication,” he told me. “The business process agent can interact directly with years of data. Integration has been a big problem. We solve this because our agent works with other peoples’ agents. We take out 90% of the drudgery from peoples’ workflows.”
ServiceNow’s AI Delivering Early Adopter Productivity Increases
ServiceNow is saving workers time by reducing the number of applications between which they must toggle during the day. ServiceNow is “a single pane of glass,” McDermott told MarketWatch. That pane of glass means the average worker no longer needs to use 17 enterprise applications a day. “AI is doing the soul-crushing work so humans don’t have to,” McDermott said.
One ServiceNow customer, telecommunications giant BT, is achieving significant increases in productivity in its call centers. “A few weeks ago, I met with BT’s CEO Allison Kirkby,” Paul Smith, ServiceNow chief commercial officer, told me in an October 23 interview.
“They are an early adopter of generative AI. Their results have been phenomenal. Call resolution time in the call center has dropped 55% and the AI summarizes the call and reports on the outcome,” he added.
Customers appear persuaded of these productivity benefits and are intensely curious about how to achieve them. “I was in Tokyo last week at an event and there were 7,500 people there — 67% more than the year before,” Smith said.
“People see the results BT achieved and want to understand how I get that. Our engineering team is driving innovation at unprecedented speed. The team is moving fast from pilot to deploying at scale. Eighty-five percent of Fortune 500 companies are ServiceNow customers. They want to get to value fast.”
My book Brain Rush concludes with a chapter on how generative AI might evolve. The book envisioned companies would build autonomous agents and use small language models trained on high quality data from their own operations to achieve domain-specific solutions that would yield more value at a lower cost than large language models such as ChatGPT.
Smith concurred this is what ServiceNow is delivering for its enterprise customers. The strong customer interest in the company’s generative AI products could bode well for ServiceNow’s stock. With an average price target of $985, according to MarketWatch, 40 analysts see some upside potential.
“I’m unaware of another company that’s beating guidance and raising it the way ServiceNow is,” McDermott told MarketWatch.