ServiceNow (NOW)

Enterprise workflow automation company ServiceNow (NYSE:NOW) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 21.8% year on year to $3.41 billion. Its non-GAAP profit of $4.82 per share was 13% above analysts’ consensus estimates.

Company Overview

Built on a single code base that processes over 4 billion workflow transactions daily, ServiceNow (NYSE:NOW) provides a cloud-based platform that helps organizations automate and digitize workflows across departments, from IT and HR to customer service and security.

The whole purpose of software is to automate tasks to increase productivity. Today, innovative new software techniques, often involving AI and machine learning, are finally allowing automation that has graduated from simple one- or two-step workflows to more complex processes integral to enterprises. The result is surging demand for modern automation software.

ServiceNow competes with large enterprise software vendors like Salesforce (NYSE:CRM), Microsoft (NASDAQ:MSFT), and Oracle (NYSE:ORCL) in various segments of its business. In IT service management, it faces competition from Atlassian's Jira Service Management (NASDAQ:TEAM) and BMC Software, while in customer service it competes with Zendesk (private) and Freshworks (NASDAQ:FRSH).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, ServiceNow’s sales grew at a solid 24.6% compounded annual growth rate over the last five years. Its growth surpassed the average software company and shows its offerings resonate with customers, a great starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within software, a half-decade historical view may miss recent innovations or disruptive industry trends. ServiceNow’s annualized revenue growth of 22.3% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, ServiceNow reported robust year-on-year revenue growth of 21.8%, and its $3.41 billion of revenue topped Wall Street estimates by 1.4%.

Looking ahead, sell-side analysts expect revenue to grow 18% over the next 12 months, a deceleration versus the last two years. We still think its growth trajectory is attractive given its scale and suggests the market sees success for its products and services.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

ServiceNow’s ARR punched in at $13.2 billion in Q3, and over the last four quarters, its growth was impressive as it averaged 21.1% year-on-year increases. This performance aligned with its total sales growth and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes ServiceNow a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

ServiceNow is very efficient at acquiring new customers, and its CAC payback period checked in at 26.8 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation due to its scale. These dynamics give ServiceNow more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

ServiceNow’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 78.1% gross margin over the last year. Said differently, roughly $78.05 was left to spend on selling, marketing, and R&D for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. ServiceNow has seen gross margins decline by 0.5 percentage points over the last 2 year, which is slightly worse than average for software.

This quarter, ServiceNow’s gross profit margin was 77.3%, down 1.8 percentage points year on year. ServiceNow’s full-year margin has also been trending down over the past 12 months, decreasing by 1.2 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

ServiceNow has been an efficient company over the last year. It was one of the more profitable businesses in the software sector, boasting an average operating margin of 13.9%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, ServiceNow’s operating margin rose by 1.8 percentage points over the last two years, as its sales growth gave it operating leverage.

In Q3, ServiceNow generated an operating margin profit margin of 16.8%, up 1.8 percentage points year on year. The increase was encouraging, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

ServiceNow has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 31.4% over the last year.

ServiceNow’s free cash flow clocked in at $592 million in Q3, equivalent to a 17.4% margin. This cash profitability was in line with the comparable period last year but below its one-year average. We wouldn’t read too much into it because investment needs can be seasonal, causing short-term swings. Long-term trends are more important.

Over the next year, analysts’ consensus estimates show they’re expecting ServiceNow’s free cash flow margin of 31.4% for the last 12 months to remain the same.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

ServiceNow is a profitable, well-capitalized company with $5.41 billion of cash and $2.40 billion of debt on its balance sheet. This $3.01 billion net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

This was a beat and raise quarter. Specifically, it was good to see ServiceNow top analysts’ revenue and adjusted operating profit expectations this quarter. Furthermore, it was good to see full-year guidance slightly raised for subscription revenue and operating margin. Overall, this print had plenty of positives. The stock traded up 4.6% to $955 immediately following the results.

Updated: December 4, 2025 at 9:10 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in ServiceNow.

There are multiple reasons why we think ServiceNow is an amazing business. First of all, the company’s revenue growth was strong over the last five years. And while its expanding operating margin shows it’s becoming more efficient at building and selling its software, its bountiful generation of free cash flow empowers it to invest in growth initiatives. On top of that, ServiceNow’s strong operating margins show it’s a well-run business.

ServiceNow’s price-to-sales ratio based on the next 12 months is 11.6x. Looking at the software landscape today, ServiceNow’s fundamentals really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $1,147 on the company (compared to the current share price of $839.99), implying they see 36.6% upside in buying ServiceNow in the short term.