ServiceNow and the Generative AI Opportunity: Assessing Valuation Realism Amid AI-Driven Growth

ServiceNow (NYSE: NOW) has emerged as a pivotal player in the generative AI revolution, leveraging its Now Assist platform to drive enterprise efficiency and revenue growth. As the company prepares to report Q3 2025 earnings on October 22, 2025, investors are scrutinizing whether its valuation reflects realistic growth prospects or AI-driven hype.

Q3 2025 Earnings Outlook: A Test of Momentum

Analysts project ServiceNow to report Q3 2025 earnings per share (EPS) of $2.34, a 7.8% year-over-year increase, according to ServiceNow's Q2 2025 financial results. This follows four consecutive quarters of exceeding Wall Street's profit estimates, underscoring the company's ability to monetize AI innovations. For fiscal 2025, EPS is expected to rise 29.4% to $9.32, with further acceleration anticipated in 2026. Revenue forecasts are equally robust, with Q3 2025 expected to hit $3.26 billion, driven by Now Assist's success in boosting Annual Contract Value (ACV) and streamlining operations, according to Simply Wall St.

ServiceNow's Q2 2025 results already signaled strength: the release showed subscription revenue grew 22.5% year-over-year to $3.11 billion, while total revenue reached $3.215 billion. These figures highlight the platform's ability to attract high-value clients, with 528 customers now holding ACVs exceeding $5 million.

AI Integration: From Hype to Hard Metrics

The Now Assist platform has become a cornerstone of ServiceNow's AI strategy. By Q2 2025, the platform had closed its first $20 million contract and is projected to achieve $1 billion in ACV by 2026, according to Monexa's analysis. This momentum is supported by strategic partnerships with AWS, Nvidia, and Cisco, which are enhancing ServiceNow's AI capabilities, per S&P Global.

However, broader industry challenges persist. ServiceNow's 2025 Enterprise AI Maturity Index reveals a decline in global AI maturity scores despite 82% of executives planning to increase AI investments, as reported in ServiceNow's Enterprise AI Maturity Index. This underscores the difficulty enterprises face in scaling AI implementations-a risk that could temper ServiceNow's growth if adoption lags expectations.

Valuation Realism: High Multiples and Free Cash Flow Potential

ServiceNow's current valuation appears elevated, with a PE ratio of 113.7x as of October 2025-well above the software industry average of 35.6x and the peer group average of 62.3x. Yet, this premium is partially justified by its projected free cash flow (FCF) growth. FCF is expected to surge from $3.76 billion in 2025 to $9.04 billion by 2029, with a discounted cash flow (DCF) model estimating an intrinsic value of $883.13 per share (Simply Wall St). At the current price, the stock is only slightly overvalued by 3.1%, suggesting a margin of safety for long-term investors.

Short-term margin pressures from elevated R&D and operational expenses remain a concern. However, ServiceNow's 2024 FCF of $3.42 billion provides flexibility to fund AI expansion without diluting shareholders. Analysts project a compound annual growth rate (CAGR) of 18.02% in revenue through 2029, with EPS growth tracking similarly.

Future Outlook: Balancing Growth and Realism

ServiceNow's 2025 growth trajectory hinges on its ability to sustain AI-driven revenue momentum. With a $13.2 billion revenue target for 2025 and a 20%+ year-on-year growth rate, the company is positioned to capitalize on the enterprise AI boom. Yet, the path is not without risks. Declining AI maturity scores and operational costs could test its margins, particularly if the broader market faces integration bottlenecks.

For investors, the key question is whether ServiceNow's valuation aligns with its ability to execute on AI innovation. While the PE ratio appears stretched, the company's FCF trajectory and strategic partnerships provide a buffer against overvaluation. The upcoming Q3 earnings report will be critical in validating these assumptions.

Conclusion

ServiceNow's AI-driven growth story is compelling, but its valuation demands careful scrutiny. The company's ability to convert AI hype into consistent revenue and FCF growth will determine whether its premium multiples are justified. As the October 22 earnings date approaches, investors should watch for signs of sustained ACV expansion, margin resilience, and progress in scaling AI partnerships. In a market where AI promises often outpace reality, ServiceNow's execution will be the ultimate test of its long-term value.