NOW: ServiceNow’s new partnership could skyrocket profits!

Introduction – AI Partnerships as Profit Catalysts

ServiceNow (NYSE: NOW) is doubling down on partnerships in artificial intelligence to fuel its next leg of growth. In particular, the company’s strategic alliances – such as those with NVIDIA for generative AI and with cloud giants like Google and Microsoft – aim to embed advanced AI into the Now Platform and drive exponential productivity gains (^[1]) (^[2]). Management is bullish that these collaborations will translate into greater customer adoption and higher-value deals. In Q4 2024, ServiceNow’s CFO highlighted a “meaningful” uptick in new AI-driven annual contract value, with Now Assist (ServiceNow’s GenAI suite) deals growing over 150% QoQ, calling it “just scratching the surface of what’s possible” (^[2]). If these AI initiatives indeed deliver elevated workflow automation and efficiency for customers, ServiceNow could see its subscription revenues – and consequently profits – accelerate significantly in coming years.

Dividend Policy and Shareholder Returns

ServiceNow has never paid a dividend and has no plans to initiate one. Its board intends to retain all earnings to reinvest in growth and development of the business, and accordingly “does not intend to pay cash dividends … for the foreseeable future” (^[3]). This means the stock’s dividend yield is 0%, consistent with many high-growth tech peers that prioritize expansion over cash payouts. Instead of dividends, ServiceNow returns capital to shareholders via stock buybacks. In 2023 the board authorized a $1.5 billion repurchase program, recently expanded by another $3 billion in early 2025 (^[2]) (^[2]). The company repurchased ~0.8 million shares for $696 million in 2024, primarily to offset dilution from employee stock compensation (^[3]) (^[2]). These buybacks signal confidence in ServiceNow’s long-term prospects and have helped keep share count growth modest. However, absent any dividend, investors seeking income must rely on future stock appreciation for returns.

Leverage, Debt Maturities and Coverage

ServiceNow maintains a very conservative balance sheet, with minimal debt and ample liquidity. Its only significant debt is a $1.5 billion senior note due September 2030 carrying a low 1.40% fixed interest rate (^[3]). The company issued this 10-year note in 2020, and aside from leases and working capital facilities, it has no other major long-term borrowings. With $9.9 billion of cash, equivalents and investments on hand as of year-end 2024 (^[3]), ServiceNow’s net debt is negative – effectively a net cash position of roughly $8+ billion even after accounting for the 2030 note. This gives the company substantial flexibility to invest, acquire, or weather downturns without financial strain.

Thanks to its light debt load, interest coverage is extremely robust. In 2024, ServiceNow’s interest expense was only about $23 million (^[3]), while GAAP net income exceeded $1.4 billion (^[3]). That implies interest was covered 60+ times by earnings – a comfortingly high ratio. Even on a cash flow basis the coverage is strong: free cash flow was $3.45 billion (31.5% margin) in 2024 (^[2]), providing huge buffer for the ~$21 million annual interest on the note. The 2030 maturity also means no near-term refinancing risk. In sum, ServiceNow’s leverage is very low, and its recurring subscription model generates reliable cash flows to service obligations. This prudent capital structure minimizes financial risk and preserves capacity for strategic moves (like acquisitions) if needed.

Valuation – High Multiples Reflect Growth Expectations

Investors have assigned ServiceNow a premium valuation in anticipation of sustained growth. The stock trades at an earnings multiple that far exceeds market norms. As of late 2025, ServiceNow’s price-to-earnings ratio (P/E) hovered around 🡕 113–139×, dramatically higher than the software industry average (~35×) and even its high-growth SaaS peers (~50–60×) (^[4]) (^[5]). This implies the market is willing to pay over $100 for each $1 of ServiceNow’s current earnings – a sign of confidence in future profit expansion. Other metrics paint a similar picture: the stock’s EV/EBITDA is above 100× and price-to-book over 20×, indicating a rich valuation relative to current fundamentals (^[5]). Even on a revenue basis, ServiceNow commands roughly 13–16× EV/sales, well above legacy enterprise software firms.

Such lofty multiples underscore that investors are pricing in rapid growth. Indeed, ServiceNow has been delivering ~20%+ annual revenue increases (^[2]) with improving margins, and the company’s operating margin reached ~30% by mid-2025 (^[6]) (on a non-GAAP basis). Bulls argue ServiceNow’s dominant position in workflow automation and new AI monetization opportunities justify a premium. However, at these valuations the stock is vulnerable to any slowdown or execution misstep. By one analysis, a “fair” P/E for ServiceNow factoring in its growth and margins would be around ~50× – meaning the current ~100× appears overvalued relative to its outlook (^[4]). In short, ServiceNow’s valuation is high, leaving little margin for error. The upside potential is tied to the company meeting or exceeding aggressive growth projections in coming years.

Risks and Red Flags

While ServiceNow’s growth story is compelling, investors should weigh several risks and red flags:

– Intense Competition and Innovation Pressure: The enterprise software market is “highly competitive, rapidly evolving”, pitting ServiceNow against giants like Salesforce, Oracle, SAP, Workday and others (^[3]). New entrants and alternative solutions (including in-house or open-source tools) constantly emerge. A “failure to innovate” quickly – especially in fast-moving areas like AI – could erode ServiceNow’s competitive position (^[3]). The company must continue heavy R&D investment to stay ahead, which could pressure margins if growth slows.

– Reliance on Partners: An increasing portion of sales comes via a network of reseller and integration partners. ServiceNow acknowledges that if key partners “fail to perform,” it could harm the business (^[3]). Partners provide essential implementation services and help push ServiceNow’s product into new markets. Any channel conflicts, partner capacity constraints, or loss of major partnerships (for example, with global SIs like Accenture or Deloitte) could impede growth. Managing this large ecosystem – now over 2,200 partners – is an ongoing execution challenge.

– Public Sector and Regulatory Scrutiny: Expanding sales to government clients brings compliance hazards. In mid-2024, ServiceNow disclosed a DOJ probe into a federal contract and a related hiring incident (^[7]). The investigation centered on the allegedly improper hiring of a former U.S. Army CIO to ServiceNow’s public sector team, which led to the resignation of ServiceNow’s own President and COO amid the internal fallout (^[7]) (^[7]). This incident highlights the strict rules around government procurement – any finding of wrongdoing could result in reputational damage, fines, or debarment from future contracts. Additionally, ServiceNow’s pending $2.85 billion Moveworks acquisition (an AI assistant startup) is under antitrust review by the DOJ, potentially delaying the deal and raising questions about reduced competition in overlapping areas (^[8]) (^[8]). Heightened regulatory scrutiny – whether for compliance or antitrust – is a notable risk for ServiceNow as it grows larger.

– Sky-High Stock-Based Compensation: Like many tech firms, ServiceNow uses stock awards to attract talent – but this results in substantial non-cash expense and shareholder dilution. Stock-based compensation has run in the hundreds of millions per year, which depressed GAAP profits historically. The company’s GAAP net income only recently climbed into the billions (reaching $1.7 billion in 2023) (^[3]), and would be markedly lower if growth slows but stock comp continued. While ServiceNow’s share buybacks partially offset dilution, the outstanding share count still rose ~2% in 2024 (^[3]). Investors need to monitor if the company can “maintain discipline on stock grants” and grow earnings fast enough to outrun this dilution.

– Macroeconomic and IT Spending Cycles: As a provider of enterprise software (IT service management, workflow automation, etc.), ServiceNow is somewhat tied to corporate IT budgets. Broader economic slowdowns or tech spending cuts can lengthen sales cycles and pressure growth. ServiceNow’s deals, especially large enterprise agreements, have become more complex and subject to longer procurement cycles (^[3]). Any global downturn, higher interest rates, or CIO budget tightening could lead to deferred projects – a risk given ServiceNow’s lofty growth assumptions. Foreign currency fluctuations (with ~37% of revenue outside North America (^[3])) are another headwind that could impact reported results if the U.S. dollar strengthens (^[3]).

Overall, while ServiceNow’s business fundamentals remain strong, these risk factors (competition, partner execution, regulatory issues, high valuation/dilution, and macro sensitivity) are important caveats. Investors should watch how the company navigates these challenges alongside its rapid growth. Any negative developments on these fronts could materially affect the stock.

Open Questions Going Forward

Despite its successes, there are several open questions about ServiceNow’s trajectory:

– Will AI Partnerships Drive Profits as Hoped? ServiceNow’s bold bets on AI (e.g. co-developing GenAI workflows with NVIDIA, integrating with Microsoft 365 Copilot, and launching AI features on Google Cloud (^[2]) (^[2])) sound promising. But the monetization of these capabilities is still emerging. How much incremental revenue and margin can AI add in the next 1–3 years? Management says 2025 moves will “define the future of agent-powered automation” (^[2]) – it remains to be seen if this translates into tangible earnings upside or if AI benefits get competed away or take longer to materialize.

– Can Growth Justify the Valuation? With the stock priced for perfection (P/E well over 100), ServiceNow must sustain high-20s percent growth and expanding margins for years to “grow into” its valuation. Is demand deep enough to keep annual subscription revenues climbing ~20%+ at a ~$11 billion base (^[2])? The company is targeting a massive $500B+ addressable market, but even slight deceleration in growth – due to competition or saturation in core IT workflows – could trigger a sharp re-rating of the shares. In essence, can ServiceNow continue executing flawlessly to meet lofty market expectations?

– What Will be the Outcome of Regulatory Probes? Both the internal compliance issue and the Moveworks antitrust review introduce uncertainty. Will the DOJ’s investigations result in fines or operational restrictions? Thus far ServiceNow acted proactively and believes the hiring incident was “isolated” (^[7]), but the final outcome is unknown. Likewise, if regulators impose conditions or delay the Moveworks deal significantly, how might that affect ServiceNow’s AI strategy? These questions around legal/regulatory matters will hang over the stock until resolved.

– How Far Can Margins Expand? ServiceNow has steadily improved profitability – reaching a 29.5% op margin recently (non-GAAP) (^[6]) – while still investing in growth. There is debate on how much higher margins can go in the long run. The company’s cloud SaaS model has inherent scale economies, but management also emphasizes reinvesting for innovation. Will margin expansion pause if the company doubles down on R&D (for AI, new products) or makes more big acquisitions? Striking the balance between growth and profitability will be an ongoing question for investors assessing the quality of earnings growth.

ServiceNow’s future will depend on how well it answers these questions. The new AI partnership strategy has the potential to unlock major profit gains if successful, but execution and external factors will determine the ultimate outcome. Investors should keep a close eye on upcoming quarters for evidence of accelerating revenue from AI offerings, updates on the DOJ inquiries, and any changes to the company’s growth/margin outlook. For now, ServiceNow offers a mix of high promise and high expectations, making thorough due diligence essential before banking on profits to skyrocket.

Sources

1. https://nvidianews.nvidia.com/news/servicenow-and-nvidia-announce-partnership-to-build-generative-ai-across-enterprise-it
2. https://servicenow.com/company/media/press-room/fourth-quarter-full-year-2024-financial-results.html
3. https://sec.gov/Archives/edgar/data/1373715/000137371525000010/now-20241231.htm
4. https://simplywall.st/stocks/us/software/nyse-now/servicenow/news/what-recent-ai-partnerships-mean-for-servicenows-2025-valuat/amp
5. https://marketsmojo.com/news/stocks-in-action/is-servicenow-inc-overvalued-or-undervalued-3543013
6. https://ainvest.com/news/servicenow-assessing-long-term-strength-valuation-concerns-2025-2510/
7. https://cio.com/article/3477586/servicenow-embroiled-in-doj-probe-of-government-contract-award.html
8. https://pymnts.com/cpi-posts/doj-probes-servicenows-2-85b-ai-merger-with-moveworks/

For informational purposes only; not investment advice.