The Deal Director
Cloud/Data/AI Infrastructure Research, Cybersecurity/Developer Tools, Adviser to Octane
ServiceNow is a bad play for anyone trying to make a directional bet on AI. The better expression is AI infrastructure, where power, cooling, custom silicon, memory, lithography, silicon photonics, InP tools and connectivity silicon are each separate bottlenecks that are structurally short on supply. x.comÂ
ServiceNow's seat business is being cannibalized faster than AI deals can replace it. Next-quarter cRPO growth is guided to 18.5%, down from 20.5%, while subscription growth was 24.5% two quarters ago; agentic usage on its platform is up 13x. Management points to AI deal value heading to $1.7bn, against a roughly $16bn subscription business. The slowdown leaves more pain ahead. Underweight, $90 target. x.com x.comÂ
ServiceNow's slowing contracted-revenue growth suggests agentic AI and growing open-source alternatives may be reducing the need for its products. Q3 operating margin fell to 9.4% from 16.8% a year earlier, net income dropped, and cRPO growth slowed from 25% to 20.5%; Q4 guidance implies 18.5%. x.comÂ
ServiceNow's unexpected expense surge makes its rich valuation more vulnerable in a struggling software sector. Revenue rose 21%, but spending drove an EPS miss and one quarter of guided cRPO deceleration; wider market conditions could hurt near term. The 20% selloff looks excessive, and few software companies should benefit as much from AI. Management could deliver over 3-5 years, though the stock is only close to a buy again now; below $100 looks good for the long term. x.com x.com x.com x.comÂ
ServiceNow's guidance growth is set to fall by another fifth next quarter, a poor trajectory rather than a buying opportunity after earnings. x.comÂ
ServiceNow still looks too expensive even after falling 60-70% from its highs, given slowing growth, compressing margins, too much dilution and significant future AI risks. @realroseceline notes guidance drove the drop: the Armis acquisition brings temporary margin pressure, current remaining performance obligations are decelerating from 22% to 18%, and stock-based compensation has reaccelerated. x.comÂ
Cost fears and CRPO misunderstandings caused ServiceNow's selloff. The stock is definitely undervalued; the market's reaction is ridiculous. x.comÂ
ServiceNow's growth and deteriorating margins do not justify its valuation. It grew 3% quarter over quarter against a 107x trailing GAAP P/E, and its margins continue to deteriorate. It remains a great company, but is mostly saturated relative to that valuation. x.com x.com x.comÂ
ServiceNow's gross profit and expense trends show its underlying business deteriorating despite the AI revenue pitch. Quarterly gross profit grew just over 10% year over year, possibly its slowest pace ever, while expenses rose across the board and profit weakened materially. Relabeling revenue as AI has not changed the trend in total sales. x.comÂ
ServiceNow is a rare opportunity because the narrative that AI will kill it is far from true. The stock is down about 31% over the past year, yet NVIDIA's Jensen Huang says ServiceNow can grow 100-fold, CEO Bill McDermott bought about $3 million of shares near $104.60, and Donald Trump disclosed a $1M-5M purchase in February. x.comÂ
ServiceNow's costs are rising far faster than revenue without the RPO acceleration management promised. Q3 revenue rose 21%, while total cost of revenue climbed 56% and net income fell 45%; stock compensation appears to be using about half of free cash flow. The selloff looks deserved, though the shares are now closer to fair value. Sustainable margins and measurable returns remain the test. x.com x.com x.com x.com x.com x.comÂ
