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Everyone knows ServiceNow though it's quite shocking not many understand what it actually does.
I think this elementary ignorance is partly what drives the current sentiment yet it's hard to argue it's not a good company. No doubt about the fact it is. The interesting part is that the stock is being treated like a premium software name whose best days are behind it. All that while the underlying business still looks like a very strong compounder.
I spent the last 3 months digging into ServiceNow, and in my view the setup looks much more interesting than the headline narrative suggests.
The bear case is easy to understand:
• AI could weaken traditional SaaS seat economics
• Microsoft, Oracle, SAP, Salesforce and others are all trying to take a piece of the pie and become the orchestration layer themselves
• acquisitions can destroy value if management is buying growth to defend the moat
• SBC is high enough to flatter free cash flow
• long-duration software names got re-rated hard in the 2026 Carnage of SaaS
All of that is real and I really put in the time and effort to dig through those 10-Ks, and wrote and extensive chapter on Risk Factors in my whole analysis.
But ServiceNow is not just another software tool. It increasingly sits in the middle of how large enterprises actually function.
It handles workflows, approvals, ticketing, service delivery, compliance trails, employee requests, customer service processes, and now increasingly AI-assisted execution.
Once that layer is embedded across departments, replacing it is not like swapping one app for another. It means retraining teams, rebuilding integrations, redesigning processes, and accepting operational disruption. That is why I think the moat here is more infrastructure-like than the market is giving it credit for, I believe it's misunderstood and much stronger than the current narrative would suggest.
**The Numbers**
In FY2025, ServiceNow generated about $13.28B in revenue, with 97% of it coming from recurring subscriptions. Subscription revenue grew 21% YoY.
The company finished the year with roughly 8,800 customers, including more than 85% of the Fortune 500. Renewal rate was 98%.
cRPO was $12.85B, up 25% YoY, and total remaining performance obligations reached $28.2B.
That is not what a broken software business looks like, neither it is sign of an early disruption. And the large-customer engine is still working, arguably better than ever before.
In Q4 2025, the company booked 244 new ACV contracts over $1M, up 40% YoY, and ended the quarter with 603 customers spending more than $5M annually, up 20% YoY. That tells me the land-and-expand motion is (more than) still alive, and that large enterprises are still deepening their commitment rather than quietly walking away. So basically the very opposite of what market is discounting.
**Profitability**
Also far better than the stock price action would suggest here.
FY2025 subscription gross margin was about 80% on a GAAP basis. Non-GAAP operating margin came in around 31%. Free cash flow was about $4.64B, good for a 35% FCF margin. For FY2026, management guided to subscription revenue of $15.53B to $15.57B, implying another 20.5% to 21% growth, alongside a 36% FCF margin.
So the market is looking at a business still growing around 20%, with elite retention, strong backlog, very high gross margins, and outstanding cash generation... yet the stock got crushed?
That disconnect is core part of my thesis.
At roughly $103 to $104 per share, the market cap is around $109B. On trailing GAAP EPS of $1.67, the stock looks expensive at around 62x earnings. I believe that's what scares people off (among other reasons, ofc). But if you stop there, you miss the bigger picture imo.
On FY2025 free cash flow, the stock was closer to 23x to 24x FCF, or roughly a 4.3% FCF yield. Using management’s FY2026 guide, the forward FCF yield moves closer to about 5.3%. For a business of this quality, with this level of recurring revenue and this kind of customer entrenchment, that starts to look much more reasonable than the market narrative suggests. Is it premium? Yes. does it deserve to still be premium? Also yes.
**Risks**
To be fair and not to be biased, there are real reasons the stock is down.
The first is AI disruption risk. If AI reduces the need for separate workflow vendors and lets broader platform vendors absorb more functionality, ServiceNow’s premium multiple can keep compressing.
The second is acquisition risk. Moveworks, Veza and Armis may strengthen the platform, but they also create integration risk, strategic complexity, and the possibility that management is paying up to defend positioning.
The third is sales-cycle risk. Bigger enterprise deals are more complex, take longer to close, and can be more sensitive to budget scrutiny.
The fourth is an SBC problem and accounting tied to it. SBC was about $1.955B in FY2025, roughly 15% of revenue. That matters a lot and I'm a big critic of SBC, generally. In this case it means the FCF story is really good, but not as pristine as the raw headline number makes it look once you account for SBC. Buybacks help offset dilution here, but one absolutely should watch FCF per share, not just FCF... This was the main reason that held me from investing sooner but eventually I pulled the trigger after further analysis of the company, concluding the management is competent enough to handle SBC.
The fifth is simple multiple compression. Even if the business executes well, a high-quality software stock can still go nowhere for years if the market decides it no longer deserves a premium valuation.
As I wrote above, I go much deeper to Risks from the 10-K filings in the whole analysis.
So the bottom line is that this is definitely not a “zero-risk bargain no-brainer.”
It is a case where the market may have moved from “priced for perfection” to “priced for meaningful trouble,” while the actual business still looks much closer to the former than the latter.
**Valuation**
My base-case DCF lands around $160 per share. Bear case is about $98.5. Bull case is around $199.
What I like about that setup is not that it promises some absurd moonshot. It's just that the bear case doesnt require the business to collapse, and the base case doesn't require fantasy assumptions to be true, either. It just assumes ServiceNow continues to mature into a larger, still highly profitable platform business, with growth gradually fading rather than falling off a cliff.
To me as an investor, that is the kind of asymmetry I like, especially when the stock is priced very close to its bear case scenario.
I know the most common bear question (and currently market's question as well for that matter) is “What if AI turns ServiceNow into a less important middleman?”
And the stock is currently virtually priced as the sceptics with that question are right. My counter-question is: “What if AI actually makes governed workflow orchestration more valuable, not less?”
That is the whole debate right now. My view is that ServiceNow is no longer being priced like a premium software darling it was a year ago. When you get a still-growing, still-sticky, still-cash-generative platform business in this kind of setup, I think it deserves serious attention. I paid the attention and went it, so the disclaimer is that I own the stock.
I wrote a full deep dive on the company here:
https://open.substack.com/pub/hatedmoats/p/servicenow-deep-dive-analysis
And detailed valuation model here:
https://open.substack.com/pub/hatedmoats/p/servicenow-dcf-valuation
Both are for free.
What are your thoughts? Do you own NOW? Why yes? Why not?