Just last week, ServiceNow (NOW) delivered a standout Q2, with strong results fueled by its AI-powered offerings—particularly the Now Assist platform. These tools are not only driving meaningful revenue growth but also enhancing operational efficiency through intelligent automation and cross-functional AI workflows, positioning ServiceNow at the forefront of enterprise software innovation.
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In fact, the cloud computing solutions innovator recorded its ninth consecutive earnings beat, making its quarterly earnings calls a bit of a repeat catalyst for the stock.
Concerns do linger, though. NOW’s premium valuation and substantial stock-based compensation remain valid points of contention for bearish investors, which probably explains why NOW stock has given up most of its gains since last week. Given the rapid pace of AI growth—outpacing virtually every other sector—I’m firmly Bullish and believe ServiceNow still has room to run, even after a 21% gain over the past year.
AI Fuels a Revenue Boom
ServiceNow’s Q2 revenue soared to $3.2 billion, a 22.5% YoY increase, outpacing last quarter’s 18.6% growth and last year’s 22.2% figure. The star of the show was, of course, AI, particularly the Now Assist platform, which saw a 50% quarter-over-quarter surge in Pro Plus deal counts. These deals, often multi-million-dollar contracts, leverage AI to simplify IT service management, customer service workflows, and HR processes.
For instance, a global bank recently adopted ServiceNow’s AI to automate compliance reporting, slashing processing times and boosting accuracy. The company closed 89 deals over $1 million in net new annual contract value (ACV), with 11 exceeding $5 million, a testament to strong enterprise demand for its solutions.
This AI momentum also lifted current remaining performance obligations (cRPO) to $10.92 billion, up 25% YoY, beating guidance by 200 basis points. CEO Bill McDermott emphasized the edge of the company’s agentic AI, which orchestrates complex, cross-departmental workflows—a capability that competitors struggle to match. As enterprises race to modernize, ServiceNow’s ability to integrate AI with its workflow platform is driving stickiness and growth, positioning it as a leader in the $153 billion AI market, projected to grow at a 40.6% CAGR through 2028.
Efficiency Gains Through AI Innovation
Beyond revenue, I think it’s exciting how AI is reshaping ServiceNow’s cost structure. In Q2, its adjusted operating margin reached 29.5%, 250 basis points above guidance, thanks to AI-driven efficiencies. Tools like Now Assist automate repetitive tasks (these include anything from incident resolution to employee onboarding), freeing up resources and reducing costs.
Meanwhile, the company’s RaptorDB platform further enhances efficiency by speeding up data processing. The platforms helped lift free cash flow margin to 16.5%, up 300 basis points YoY. Also, NOW’s adjusted net income grew by 31% YoY to $854 million in Q2. As AI continues to refine operations, ServiceNow is building an increasingly profitable business.
All in all, the firm continues to demonstrate long-lasting revenue growth, as evidenced by the number of large customers it has attracted over the past five years. According to TipRanks data, NOW is now servicing over 2,000 large customers.
Valuation and SBC: A Premium Worth Paying?
Now, let’s address the elephant in the room: ServiceNow’s valuation. With a forward P/E ratio of 53x, NOW stock appears to be trading at a steep premium. Another concern I have is the company’s stock-based compensation (SBC), which accounts for approximately 15% of revenue—a lofty figure for a company as mature as ServiceNow. This elevated SBC inflates free cash flow margins; therefore, investors should scrutinize the 16.5% FCF margin to gain a more accurate understanding of the cash picture. In fact, note that over the past 12 months, NOW has generated about $4 billion in free cash flow. However, the firm paid $1.85 billion in SBC, which continuously dilutes shareholders.
That said, the company’s growth story makes a compelling case for its valuation. ServiceNow raised its full-year subscription revenue guidance to $12.775–$12.795 billion, which suggests 20% growth, while its 98% renewal rate underscores customer loyalty. With AI reshaping industries and ServiceNow apparently leading in agentic workflows, NOW’s premium feels justified for those with a long-term view.
Consistent “beat-and-raise” quarters and a strong competitive moat further bolster confidence. Just for context, ServiceNow’s revenues have grown at a CAGR of 26% over the past five years, with little to no signs of slowdown recently, all while the scaling of the business drives even stronger earnings growth. Importantly, this trend is likely to persist at least in the medium term (and potentially even longer into the future, assuming AI’s benefits start to compound).
Evidently, today, the consensus EPS estimates see a CAGR of 30% over the next five years. Thus, today’s multiple should normalize relatively easily in the coming years, and so I don’t expect a notable pullback, assuming a valuation compression takes place.
Is ServiceNow a Good Stock to Buy?
Currently, analysts are very bullish on NOW stock. The stock carries a Strong Buy consensus rating, based on 29 Buy, three Hold, and one Sell ratings assigned over the past three months. Today, NOW’s average stock price target of $1,148.61 implies 18.5% upside potential over the next twelve months.
AI Boom Fuels NOW’s Long-Term Investment Case
ServiceNow’s latest results highlight the effectiveness of its AI-driven strategy, delivering strong growth and improving operational leverage. While its elevated valuation and significant stock-based compensation warrant attention, the company’s steady execution, high customer retention, and expanding AI capabilities support a bullish long-term outlook.
As enterprises continue to embrace intelligent automation, ServiceNow is well-positioned to benefit from this secular shift. If its current momentum persists, the premium valuation may prove justified—making it a compelling contender in the future of enterprise software.