ServiceNow: An Excellent Business Trading at a Discount

ServiceNow (NYSE: NOW) regularly racks up 20%-plus yearly revenue growth and attractive margins. It has won praise from Nvidia CEO Jensen Huang, who called ServiceNow the "enterprise operating system" for artificial intelligence (AI). Huang also regularly speaks at ServiceNow's annual events, showing how much he believes in the company.

The Nvidia endorsement is huge, and it's backed by real fundamentals. Even with those tailwinds, the growth stock is down by roughly 35% year to date, but it likely won't remain that way for long.

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AI workflows have produced high retention rates and steady growth

ServiceNow helps businesses set up AI operating systems for every part of their business. Companies can use these bots to enhance productivity, reduce expenses, and produce higher-quality customer experiences. While other companies also offer AI bot platforms, ServiceNow has become the premier option, with more than 85% of Fortune 500 companies using its platform.

The company has also expanded to approximately 8,800 customers on subscription plans. That stream of annual recurring revenue makes growth more scalable and easier to predict. It also helped ServiceNow beat all top-line growth and profitability metrics in the first quarter. ServiceNow also decided to raise its full-year subscription revenue outlook.

Revenue increased by 22% year over year in Q1 to reach $3.77 billion. The company also has $12.64 billion in current remaining performance obligations, a 22.5% year-over-year increase. That backlog offers clear revenue visibility for the next 12 months, with $27.7 billion in total remaining performance obligations that stretch for multiple years.

The AI control tower for business reinvention

ServiceNow CEO Bill McDermott touted the company as the "AI control tower for business reinvention." ServiceNow integrates with any model, cloud, interface, data, or system that customers use for their businesses. That gives ServiceNow a compelling competitive advantage and explains why retention rates are high. ServiceNow enjoyed a 97% renewal rate in Q1, showing that most customers stick around.

The continued expansion of agentic AI serves as another catalyst that can increase the average contract value of its customers. As AI workflows expand, companies may have to upgrade their subscriptions to get more capabilities and handle more volume.

That's part of the reason the number of Now Assist customers spending more than $1 million in annual contract value grew by more than 130% year over year. ServiceNow is seeing more demand from high-paying customers, which acts as a good foundation for future revenue growth.

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