ServiceNow Stock Soars on AI Momentum. Is It Too Late to Buy?

Share prices of ServiceNow (NYSE: NOW) popped after the software company reported strong revenue growth to start the year and raised its guidance. While it's still trading down about 10% year to date, as of this writing, the stock is up about 27% over the past year. Meanwhile, it has been a huge winner over the past decade, up more than 1,150% during that span.

The software-as-a-subscription (SaaS) company is best known for its information technology (IT) management platform, which is widely used by IT departments to manage networks and support tasks. And now, with its workflow automation and digital processing tools, it is expanding into other areas such as human resources and customer service.

The core value of its platform lies in connecting siloed departments and helping organizations digitize and streamline their operations. It also made some acquisitions, including Moveworks and Logik.ai, to enhance its customer relationship management (CRM) offerings.

It is also leaning into artificial intelligence (AI), incorporating both generative AI and agent-based AI into its platform. Its Now Assist, a generative AI assistant, helps customers in several ways, including providing an AI chatbot to handle questions, a text-to-code generator, and a case summarization tool.

More recently, it introduced AI agents to automate workflows and provide support without the need for human intervention.

AI helps drive growth

AI was one of the biggest drivers of ServiceNow's first-quarter revenue growth. Its number of Pro Plus deals, which includes its AI solutions, more than quadrupled year over year. And 15 of its 20 largest deals included Pro Plus products. In addition, it signed 39 deals that had three or more Now Assist products.

Overall, revenue rose 18.5% year over year to $3.09 billion, while adjusted earnings per share (EPS) also climbed 18.5% to $4.04. That topped the analyst consensus, which was looking for EPS of $3.83 on revenue of $3.08 billion, as compiled by the LSEG.

Subscription revenue climbed 19% year over year to $3 billion, while professional services revenue increased 5% to $83 million. The company continues to do well in adding large customers, increasing its number of customers with a net annual contract value (ACV) or $20 million or more by nearly 40%, and customers with ACVs of $5 million or more by nearly 20%. It had 72 deals greater than $1 million in net new ACV in the quarter, up from 63 a year ago. The company called out the manufacturing and healthcare/life sciences sectors as being bright spots. It also said its U.S. government business was solid.

Another metric investors like to follow with ServiceNow is growth in remaining performance obligations (RPO), which is deferred revenue plus backlog growth. The reason for this is that it can be an indication of future revenue growth. In the quarter, the company saw RPO climb 25% to $22.1 billion, while current RPO (cRPO) increased by 22% to $10.3 billion. This is a good indication that revenue growth should remain around 20% in the near term.

In fact, that is around where the company forecast its second-quarter revenue growth. It projected its subscription revenue to grow between 19% to 19.5% to a range of $3.03 billion to $3.035 billion. It is expecting cRPO to also increase by 19.5%.

For the full year, the company slightly increased its subscription revenue guidance. It now expects subscription revenue of between $12.64 billion to $12.68 billion, up from a prior forecast of $12.635 billion to $12.675 billion. The updated forecast represents growth between 19% to 19.5%.

Image source: Getty Images

Is it too late to buy the stock?

As a company that helps its customers create operational efficiency and enhance their digital platforms, ServiceNow is well-positioned even in a more cautious and uncertain economy. It's also expecting significant opportunities in the federal sector after budget cuts. It has even introduced a new government transformation suite that has been purpose-built to help accelerate digital transformation, increase transparency, and improve public service delivery.

The company is looking like an AI software winner, and the combination of generative AI and agentic AI should only solidify its position. It's already seeing strong AI growth, and that should continue.

From a valuation perspective, the stock now trades at a forward price-to-sales multiple of 14.8 based on 2025 analyst estimates. For a high-margin SaaS business with about 20% revenue growth, that valuation is reasonable, although not in the bargain bin.

As such, I wouldn't chase the rally in the stock, but I think it still has solid upside from here over the long term. In the meantime, I would be on the lookout to buy the stock if it gets caught up in any market dips.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ServiceNow. The Motley Fool has a disclosure policy.