ServiceNow's Rally: Valuation Checks and Future Growth Prospects

ServiceNow's stock has risen 115.7% over three years and 11.7% in the last year. Despite a 6.5% drop in the last month and an 11.9% year-to-date decline, the stock recently increased 5.9% due to optimism around digital transformation trends and growing enterprise cloud demand. ServiceNow's value score is 1 out of 6, indicating it is undervalued in one area. The company's Free Cash Flow is expected to grow to $9.04 billion in 2029 and $14.32 billion by 2035.

ServiceNow's (NYSE: NOW) stock has experienced significant volatility over the past year. Despite a robust performance with a 115.7% increase over three years and a 11.7% rise in the last year, the stock has seen a 6.5% drop in the last month and an 11.9% year-to-date decline. However, recent optimism around digital transformation trends and growing enterprise cloud demand has led to a 5.9% increase in the stock's price. The company's value score is 1 out of 6, indicating it is undervalued in one area [1].

ServiceNow's financial performance has been strong, with revenue growing from about $5.9 billion in 2021 to nearly $11 billion in 2024. Net income has also grown, reaching $1.66 billion over the trailing twelve months, supported by industry-leading gross margins of almost 79% and free cash flow of $3.85 billion. However, the stock's appreciation has been relatively modest, increasing by approximately 6.8% over the past year and down nearly 17% year-to-date [1].

The stock's high valuation remains a concern for investors. Despite a contraction in the price-to-earnings (P/E) ratio from over 170x during the post-pandemic tech boom to around 110x today, it still trades at a premium compared to competitors such as Microsoft at 37x or Oracle at 54x [1].

Several factors contribute to investor unease. ServiceNow's growth in subscription revenue has slowed, with the company reporting a 21% year-over-year increase in Q2 2025, compared to competitors like Microsoft Azure's 39% growth or Google Cloud's 32% [1]. Additionally, the company's AI strategy, while intriguing, may not provide sufficient differentiation to warrant its high valuation, as competitors like Microsoft and Salesforce are integrating AI directly into widely used platforms [1].

Economic challenges also loom large. Inflation, stricter corporate budgets, and uncertainty regarding global growth could impede enterprise IT spending, directly affecting ServiceNow's subscription-based model. Although renewal rates remain strong, there is a risk that new deal flow may decline if CIOs postpone digital transformation efforts [1].

ServiceNow's stock has exhibited volatility during previous market downturns. In 2022, the stock experienced a peak-to-trough drop of 51.3%, compared to the S&P 500's 25.4% decline. In 2020, during the COVID-19 pandemic, the stock declined by 30.2%, compared to the S&P 500's 33.9% drop [1].

Despite these challenges, ServiceNow continues to be a leading software provider with strong cash flow and margins. However, sustaining growth rates in the face of increasing competition and macroeconomic risks will be challenging. At current valuations, even slight disappointments could lead to significant declines in the stock's price.

References:
[1] https://www.forbes.com/sites/greatspeculations/2025/08/26/servicenow-stock-to-less-than-450/
[2] https://www.marketbeat.com/instant-alerts/filing-b-metzler-seel-sohn-co-ag-boosts-stock-holdings-in-servicenow-inc-now-2025-08-27/