ServiceNow — a Santa Clara, Calif. provider of digital workflow services — has enjoyed a nearly 50% increase in its stock price in 2023.
After reporting growth and profitability above expectations and raising guidance for the year on July 26, its stock lost 5% of its value in after-market trading.
To me that looks like an opportunity for investors. My interview with CEO Bill McDermott suggests ServiceNow’s new line of generative AI products could accelerate growth — which could put in reach the $800 a share price target he shared with me in 2022.
ServiceNow’s Strong Results And Guidance
The general rule for public company CEOs is if you report better than expected revenue and earnings growth and raise your guidance, investors reward you by boosting your stock price.
That rule did not work when ServiceNow reported second quarter results July 26. Despite beating expectations, raising guidance, and introducing new GAI products with considerable revenue potential, its shares fell after-hours by about 3.5%.
Here are the highlights of its report, according to Investor’s Business Daily:
- Revenue $2.15 billion, up 23% and $20 million more than expected.
- Adjusted Earnings Per Share: $2.37, up 46% and 34 cents more than analysts expected
- Current Remaining Performance Obligations: $7.2 billion, up 25% — three percentage points above the company’s forecast.
- 2023 Subscription Revenue Outlook: $8.59 billion, up about 25% — some $85 million above the analysts’ estimate.
ServiceNow is thrilled about its performance and its future. As McDermott told me in a July 26 interview, “We beat the high end of our guidance and raised our revenue and operating margin forecast. The big story is Generative AI. It will be a $7 trillion gross domestic product opportunity in the next ten years. AI will be a dominant force and we are announcing new products” to help our customers benefit from it.
New Generative AI Products Could Boost ServiceNow’s Growth
ServiceNow’s new GAI products aim to increase its clients’ productivity. Since ServiceNow currently benefits from the technology within its own operations, it can offer them valuable insights.
AI Lighthouse To Help ServiceNow Customers Operate More Effectively
One of the company’s new AI services is AI Lighthouse, “a first-of-its-kind program in partnership with NVIDIA and Accenture
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McDermott struck me as very excited about its potential. As he said, “We are partnering with Nvidia’s CEO Jensen Huang and Accenture to bring the best engineering talent to provide companies with high payoff Generative AI applications for their customers and frictionless employee onboarding.”
AI Lighthouse will use GAI to develop industry-specific solutions. With case summarization — which uses GAI “to read and distill case information across IT, HR, and customer service cases,” according to ServiceNow — text to code, text to workflow and a natural language human interface, our solutions will improve operations for the specific industries including telecommunications, financial services, public sector, and manufacturing.
ServiceNow does not see GAI reducing corporate employment. McDermott said, “80% of employers are struggling to find and keep employees. Gen AI will help these companies attract and keep workers by offloading the soul-crushing part of their jobs to AI and leaving the more interesting work for the employee. Turnover will drop and employee satisfaction will increase.”
ServiceNow Uses GAI To Boost Productivity
Currently ServiceNow is using GAI to enhance the performance of its internal operations — specifically in sales and engineering.
As Rajeev Sethi, ServiceNow’s VP, Emerging Technologies, told me in a July 21 interview, “We have 10 use cases at ServiceNow. The most popular one is Sales Assist which enables our new sales employees to get answers to questions about a product or specific-industry from a ChatGPT-like interface. This frees up the time of the experienced sales people who answered those questions and boosts the productivity of new sales people who no longer need to pore through product collateral.”
In addition, ServiceNow has boosted the productivity of its engineers by 30% with help from a GAI application enabling new engineers to convert text-to-code and to get clear explanations of ServiceNow’s existing code, Sethi explained.
The quality of these solutions depends on the relevance and accuracy of the data used to train them. ServiceNow solves the data quality problem by pulling “information from within a customer’s environment to ensure results are more accurate and to help reduce the likelihood of error or hallucinations,” noted Sethi.
Where ServiceNow Stock Goes Next
How much will ServiceNow’s GAI products add to the company’s revenue?
While optimistic, McDermott declined my request to provide a specific amount. As he told me,”Our AI Lighthouse Customer Program will increase our growth and add to shareholder value. We have 125 of the largest companies seeking to participate in this program. One of the best engineers in the world who worked at Apple
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An analyst who covers the GAI industry sounds optimistic about ServiceNow’s prospects, In a July 26 email, Daniel Newman, CEO, Futurum Group, a technology researcher, noted, “While $NOW has not yet revealed its expected incremental growth from AI, I expect it to have a sizable impact on both growth, retention, and net revenue expansion.”
He expects three-fold growth in AI spending by 2028 at a compound annual rate of 22%. Newman wrote, “The market should be using that number as the bar for incremental revenue growth from AI capabilities and services across the portfolio. [ServiceNow] is showing no signs of deceleration with a fairly sizable upside if its AI story converts as I expect it should.”
Morningstar is bullish on ServiceNow. As Dan Romanoff Senior Equity Analyst wrote July 26, “ServiceNow exceeded our expectations for both revenue and profitability for its second quarter, provided good guidance for the third quarter, and raised its full-year outlook. Strong revenue paired with disciplined operations drove good margins.”
Romanoff describes ServiceNow’s performance as “impressive, especially as the macro environment is unchanged.” He sees a revenue contribution from GAI coming later this year “with substantially higher pricing” of the company’s Pro versions of its product.
CNN Business says 34 analysts’ median 12-month price target for ServiceNow is $642 — some 11% below its current price.
If ServiceNow exceeds expectations in the third quarter, its stock could bit $800.
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