Is ServiceNow's Premium Valuation Worth the Wait?

ServiceNow (NOW) has long been a darling of the enterprise software sector, its cloud-based workflow automation platform and AI-driven innovations propelling it to a market cap exceeding $100 billion. Yet investors are now asking a critical question: Does its premium valuation—currently trading at a P/E ratio of 137.6x—still reflect its growth prospects, or is the stock overvalued amid recent underperformance?

A Growth Engine Fueled by AI

ServiceNow's latest earnings underscore its dominance in the enterprise software space. In Q1 2025, subscription revenue surged 19% year-over-year to $3.005 billion, while total revenue grew 18.5% to $3.088 billion, outpacing guidance. The company's AI platform, including its agentic agents for telecom and public-sector automation, is a key driver. Strategic acquisitions like Moveworks (enhancing self-service capabilities) and Logik.ai (bolstering CRM/CPQ solutions) further expand its product ecosystem.

The metrics paint a compelling picture:
- Current Remaining Performance Obligations (cRPO) rose 22% to $10.31 billion, a 250-basis-point beat over guidance.
- Customer count with over $5 million in annual contract value (ACV) hit 508, up 20% year-over-year.

Valuation: A High Bar to Clear

Despite these positives, ServiceNow's valuation remains a sticking point. At 137.6x trailing earnings, it trades at a premium to peers like Salesforce (13.7x) and Workday (65.2x). Analysts argue that this multiple hinges on ServiceNow's ability to sustain its growth rate indefinitely.

The challenge? The company's revenue growth has slowed from the mid-30% rates of 2020 to the low-to-mid-20% range today. While AI-driven innovations aim to reignite growth, execution risks persist. Competitors like Microsoft (with its Viva platform) and Oracle (Cloud@Customer) are also intensifying their AI pushes, raising the stakes.

Stock Underperformance: A Reality Check

The stock's recent volatility highlights investor skepticism. After hitting an all-time high of $1,170 in January 2025, NOW declined sharply to a June low of $957—a 19% drop—amid broader tech sector corrections and macroeconomic jitters. While it rebounded to close June at $1,028, the stock remains below its 200-day moving average, signaling lingering uncertainty.

Analyst sentiment has also cooled. While the consensus rating remains a “Moderate Buy,” notable downgrades emerged in June. Jefferies trimmed its price target to $1,025 from $1,250, citing valuation concerns, and Guggenheim downgraded to “Sell” with a $716 target. Meanwhile, bulls like Mizuho and BMO Capital reaffirmed optimism, with targets up to $1,185.

The Case for Caution—and Hope

ServiceNow's premium valuation is justified only if its AI strategy can deliver sustained hypergrowth in three critical areas:
1. Cross-selling into existing customers: With 508 clients at the $5M+ ACV threshold, upselling higher-value AI solutions could boost margins.
2. Penetration into new verticals: Partnerships with NVIDIA and Google Cloud aim to expand into industries like automotive and healthcare, where its agentic agents could automate complex workflows.
3. Defending against commoditization: As rivals replicate its automation tools, ServiceNow must maintain its lead in AI-driven “self-healing” systems that reduce IT costs.

Investment Considerations

• Buy if: You believe ServiceNow can maintain 20%+ revenue growth for the next three years and outpace AI competition. The stock's 19% upside to consensus 2025 estimates ($16.57 EPS) could reward patient investors.
• Hold if: Valuation concerns outweigh growth potential. The stock's sensitivity to macroeconomic cycles (e.g., IT spending cuts) and execution risks make it a volatile bet.
• Avoid if: You prioritize safety over growth. The P/E multiple leaves little room for earnings disappointments.

Final Analysis

ServiceNow's premium valuation is a bet on its AI-driven future—not its present. The company is undeniably executing well today, but the stock's high multiple demands that growth accelerates or at least sustains in a crowded market. For bulls, the $1,100–$1,200 range represents potential upside if AI adoption surges. For skeptics, the June dip offers a testing ground: If ServiceNow can stabilize above $1,000 while expanding into new industries, its premium may prove justified. The verdict? Hold for now—wait for clearer signs of AI-powered growth before committing to a long position.