Episode 51 | ServiceNow in the Age of Agentic AI: Financials and Forward Strategy

In Episode 51 of “Market News with Rodney Lake,” Professor Lake, director of the GW Investment Institute, starts season 3 with an in-depth analysis of ServiceNow. Lake highlights ServiceNow’s strong enterprise software performance and strategic shift toward agentic AI-powered solutions. The company demonstrates exceptional gross margins of approximately 79%, consistent free cash flow growth, and a well-managed balance sheet. However, modest net margins and a high forward PE at 58 times raise concerns among analysts. CEO Bill McDermott earns high marks for his leadership through organic growth and AI-focused acquisitions, including the recent acquisition of Moveworks. Professor Lake encourages analysts to closely track the company’s growth trajectory, net income, and capital allocation decisions in the near future.

Chapters

• 0:00 Introduction
• 3:40:00 Business
• 12:20:00 Management
• 15:42:00 Price Valuation
• 20:48:00 Balance Sheet
• 22:09:00 Conclusion

Transcript

Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started.
Welcome back to “Market News with Rodney Lake.” I'm your host, Rodney Lake. On today's episode, there's a couple of things that we're going to cover up front. Some housekeeping. And just to be clear, we're coming to you from Duquès Hall right here in the heart of Foggy Bottom, Washington, D.C.. Thank you to the Duquès family. And I saw Rick and his family at the Yankee event in New York.
Great to see you and great to see everybody. This is the kickoff to our third season of “Market News with Rodney Lake,” a show by the GW Investment Institute. A couple of things. Number one, I am grateful, to all of our listeners. I'm grateful for the people who tune in on the podcast and the people who watch on YouTube.
I'm so grateful for all of you. Thank you. Please keep tuning in and obviously tell others if you think this is useful. A couple of other thank you's. The people that make this show happen. So the people at the Investment Institute, Bojana Jankovic, Kathleen Hinman, Danielle Lucero, Willow Rudden. They make all these things happen behind the scenes. And so if it looks like I'm prepared, it's because of them.
If it looks like I'm not prepared, that's probably because of me. The people that run the studio, those gentlemen, Jeff Carpenter and Josh Waldrum Thank you to them, for making things happen in the studio. We have a fabulous studio, the Duquès family studio, and they do a great job running it. And to the manager of that, Susan Copp.
Thank you as well. Really it's a team of people that makes this all work. And so thank you to everyone. Thanks to the audience and thanks to the team that makes “Market News with Rodney Lake” happen. Again, this is the kickoff, the start of our third season. This is episode 51. Thanks, everybody. All right. What are we talking about today?
So today we're going to be talking about a company. It's a portfolio company. It's not a big position in the portfolio but it's an important one. And it's an important one I think for people to watch. The company is called ServiceNow. The ticker is NOW. And what they have been getting into is agentic AI. So some of the things that you should be thinking about is, you know, artificial intelligence very broadly.
And you certainly hear news all the time about ChatGPT, Nvidia, which is our largest position and we've talked about quite a bit and we'll talk about it again, don't worry. But some of the other companies that are in this that I think you should be paying attention to. One of those is ServiceNow. Bill McDermott runs this company.
We're going to talk about the management. But they sell, you know, to enterprises. They sell to companies that are trying to run their business more efficiently. They're trying to run their systems more efficiently. They, their delivery is software-as-a-service. So I think it's really important to understand the business model, but it's really important just backing up for a moment to understand what's happening broadly in this AI world and what's happening on the agentic front.
So what's happening where people can deploy agents on their behalf and companies and get things done, especially in the background when you start thinking of large companies and you have big enterprise systems and you got to get data moved around, or if you got to get things done, these systems are going to help you do that.
And so as your company grows, you're going to need better software, better infrastructure. ServiceNow is going to be one of those people that helps you do that. It's a powerhouse in the cloud software space. And obviously it's been making big moves into AI, and that's why we're talking about it. And so this is around automation, automating tasks, automating things at work, and workflows.
And so these are the things that I think you should be thinking about as an investor, as an analyst and as a business person. All right. So getting into it, let's talk about the business. And so let's start diving in. As a reminder, we're going to be using the GW Investment Institute framework: business, management, price valuation, and balance sheet to analyze this company.
And a reminder disclaimer, this is for entertainment and educational purposes only. This is not investment advice. All right. So ServiceNow. All right. What's the market cap of this company? So let's get some basics around okay. What's the market cap? This is a fairly large company, $200 billion. So it's not as big as the companies that we talked about.
And the the Mag seven where you're talking trillion, now $4 trillion for Nvidia as an example. But $200 billion is a large company. And so this company has grown substantially. Bill McDermott has been responsible for a lot of that. And and really he's pushing this company towards AI. And we'll talk about that in the management, as well as the business part here.
So but let's get into the to the numbers. So when we talk about all right, what's the numbers for this company? And so $200 billion market cap. What's the revenue for the company? So it's a software-as-a-service. They're selling AI solutions to companies. So you know cloud based set up. What's the revenue? So the revenue 11.5 we can say billion dollars as of March 31st, 2025 for the trailing last 12 months, for that period.
And if you go back and we always encourage our analysts and business people and our students who are taking our classes, it's important, obviously, to understand where they are currently. And really, that's what you want to make sure you understand most completely is where they are now and where do you think you're going? Because as an investor, we need to understand that.
But it's also important to understand, well, how did they get here? And do you think they can either repeat or change course or whatever it happens to be? Obviously, a lot of times successful CEOs have, you know, they leave those breadcrumbs so that we can understand are they doing a great job? Are they going to continue to do a great job?
And you can see it in the numbers. And if you look at what's been happening at ServiceNow, if you go back all right, now the 2024 full year numbers, almost $11 billion, $8.9 billion, the year before 2022, $7.2, $5.8 in 2021. And so if you go from 21 to 22, I'm going to give the growth rate.
So in 21 30% growth in revenue, 23% in 22, 23% in 23 almost 24%, 22% in 24. And the year over year number through March is 21%. So pretty steady, growth rate here. Obviously it's come down a little bit hard to sustain 30% growth rates. But you're still 21%. Now the projected again, what as an analyst, as a business person, as an investor, what do we need to think about today and tomorrow.
What's going to happen. The consensus number for the full year 25 18% and 18% for 26. So it's obviously coming down a bit. Again, hard to sustain those 20% year over year growth rates. But those are still impressive numbers. And so something to watch out for is okay. What's going to be happening with that? Can they sustain this?
Are they going to hit those numbers? So as an analyst we have to pay attention. Again this is a position in our portfolio, not a big position. Maybe we should size it up. Maybe we should keep it the same way. That's going to be for our analyst to figure out. And certainly as the fall semester gets started, our analysts will be working on that at the GW Investment Institute in our classes.
All right. Now let's look at what's happening. We're in the business part, now what's happening on the gross margins. So that's, you know, the revenue minus cost of goods sold, things that are directly attributable to the business selling the goods. And so some a little bit of accounting. As an analyst, you need to make sure that you understand some accounting, make sure you understand what's happening with, you know, what is the gross margin.
And so when we look at this, it's how efficient, you know, a demonstration of how efficient they are, and the products here or the services. So let's, let's talk about the gross margin, 78% gross margins right now. That is stellar, right? That is in the Visa, that is in the Nvidia category. If you've been following the show and watching the show, you would know that this is exceptional, right?
When you when you're in the 70s and you're at 78.9% right now in the trailing 12 months, that's exceptional. Now again, go back. Is this a one off? Is this something that they just produced this year? Make sure you understand where the company's coming from and where it's going. All right. Where has it come from? So if you look at the 21, 22, 23, and 24, 77%, 78%, 78% and 79% respectively, and then another 78.9% to about 79% projection. Again, where we are today, where we're going tomorrow, 81% and 81% for 25 and 26 consensus numbers.
So it looks like they're absolutely moving in the right direction. The emphasis on AI, important, and obviously looks like it's having a positive impact on gross margins. And we'll talk about the some of the acquisitions in the management section here. So it looks like the way that they're growing the business organically and the way that they're doing their acquisitions is paying off in that gross margin number, both currently that they're able to sustain that.
And increase it actually a little bit. And the projection is to go a little bit higher. And going higher than 79 is really tough to do. You can only get to 100 right. And so, so if we look at this, that's great news, that is certainly something that we attribute to good management and to being in a good business.
All right. So let's drop down to the net margin. So the gross margins are very impressive for a ServiceNow the net margins on the other hand are less impressive. And so the current trailing 12 months when you look back through March and the last 12 months, the net margins are about slightly less than 14%. Those are not the software margins that you're thinking like, okay, we got 70, you know, 5 to 80% gross margins.
Maybe we should be getting 50 plus net or at least 30 plus that. We're in the, you know, 14 like what's going on. So that's something. And as an analyst okay. Well what's happening. You know with this where's the you know, why is there such a dramatic difference? And what's the you know, again, most importantly, what's happening from here.
So and if you look at okay, well what's been happening to the net margins over time. So you know maybe they've been, you know, plowing lots and lots of money and really there's nothing left back into the business. And again, as an analyst, that's something you have to understand. And let's look at from 21 to the current here.
So you talk about 2021, 2, 3 and 4. You're at 4.2%, 4.8%, and that jumps to almost 20%, and then back down to 13%. And then it's 13% again almost 14% now. But the projected margins which again important to watch go into 26 go into 26% for 25 and 26 respectively. So that's fantastic. Moving in the right direction, keeping those high gross margins, increasing those net margin.
So it also could be a sign where the business is evolving. It's maturing. It's now having net margins. It's growing earnings. And on the positive side of the net income. So now let's look at okay. Well what's happening from free cash flow. So the other part to the business that we're going to be focused on. And obviously this is going to be interrelated to the balance sheet.
What's happening on the balance sheet. Free cash flow for this business. You're talking $3.6 billion. So that's fantastic. And so really, really good. Free cash flow generation from the business. And you take that's the March 2025 number full year last year, $3.4. And if we look back 21, 22, 23 and 24, $1.8, $2.1, $2.7 and $3.4 respectively.
So you've had really good growth of free cash flow. Fantastic. Good sign for the business. Good sign. Really well run. And now let's jump in to the management. So before we move on though, what should we score the business? Well, right now the business is obviously, maybe it's not obvious, but it should be obvious from going over these stats that they're moving in the right direction.
So if you didn't tell us that this was a software-as-a-service business, and this wasn't moving into agentic AI, and you looked at these numbers, you would still say, wow, this company has really impressive gross margins. It's growing its net margins, and it's generating good free cash flow. Those are all very positive signs for the business.
Then, you know, they are moving into agentic AI. They are in a space and they sustain these gross margins and now they're increasing their net margins. So I think the business deserves an eight and possibly better, but let's say an eight for right now. And that can go up or down. It could be more conservative. But I think that's reasonable.
All right. Let's move on. So if we talk about the management and what's happening at the management side. So Bill McDermott is the CEO and has been since 2019. And he's a sales legend in the business, let's say. And he really had great success at SAP before that. And he's having good success, at, at ServiceNow now.
And so really important, to to look at his track record, what's, what's he done at ServiceNow? He's been transforming in the business, certainly pushing them into the AI world. And they're again an enterprise software IT player. And so they have absolutely been going much harder into the cloud and much harder into the agentic AI, automating processes, making companies more efficient.
Right. Your business is designed to deliver value to a customer. And if you can do that, you can get paid for that. They're absolutely doing that. How do we how do we save money for our customers? How do we get their enterprise systems to be more efficient? To, you know, to work with less people in some cases in order to just to do more with the same number of people in many cases also.
So Bill McDermott, doing a fantastic job, has been there since 2019. Now let's just go over some more recent acquisitions. And so we talked about capital allocation. Obviously that's super important. They've been growing organically. And you can see that in the sales numbers. But also they've been growing by acquisition. So when we talk about some of the acquisitions, I think it's really important to think about, okay, well what have they done.
And what are some of the most important ones? And so I think the one that I think is we’ll just highlight, so they've done, several, but they've really been doing these things in, in the AI space. And I think it's really important on the Moveworks. And so that's the biggest one, most recently and that's, that's certainly something that I think people should be paying attention to.
And so, the move forward acquisition happened just this year. And if you talk about, you know what, you know what they paid for that $2.85 billion, I think it's a mix of cash and stock. And this really is helping them get more into the enterprise, automating, IT, HR. And so this really continues to position them as this agentic enterprise AI software business, for companies, making companies more efficient.
And I think it seems like that Bill McDermott is doing an excellent job. Obviously, that's one example. There are others. And we could go over those, possibly at another time. But Bill McDermott, really good track record at SAP, so far a great track record at ServiceNow. On the capital allocation side, I think doing a fantastic job.
And so when you talk about, okay, well, what's, what's happening there, on the growth side, the acquisition side seems to be doing super well. They don't they don't pay dividends. And we talk about capital allocation that that's part of that. No dividend. This is a growing business. And they have been growing and they're doing a great job with growing the business.
And, you know, tip of the cap there to Bill McDermott. Maybe you can be on the show. Bill. Please please do. All right. So next up and so but before we move on, let's give the score, on the management side, I would also say excellent. An eight to Bill and company for doing an excellent job managing this business.
Next up is going to be on the valuation side. And we're going to bring all the pieces back together to and talk a little bit at the end to wrap it up. But now we're on the valuation. So this is where there's a lot of criticism for this business. And so it's traded at a really big premium to the market for basically a long time.
And so if you look at okay, well what's the for PE? Again we care about what's happening in the future. So as analysts we're thinking about the forward PE not the trailing but what's the forward PE. Because we care about today and what we think is going to happen tomorrow. And that's what we're paying for. So right now trading at 58 times that is not cheap right.
Certainly way more than the S&P 500. Now you would say you look at the stats. They should absolutely be more be more S&P trades at 23 to 25 times right now. Is it deserve a you know more than a double on that closing in on a triple? Well I don't know. It's something to think about. But these transformative businesses are obviously going to get a lot of concentration.
And so we have to we have to understand that valuation. And we have to understand where do we think the growth is. And we have to make sure that, you know, our view of the market is okay, it's going to grow faster than what's expected. So if we look at those numbers on the revenue side, if we think it's going to go faster and we think that those net margins can be better, well, we we can pay that 58 times and still make money, because the expectations are already built into those numbers.
Now, if they don't do that, if they fall short of those numbers on the revenue side, and the net income side, and why do I focus on the net income? Because that's really going to set the multiple over the long term, right? Why would people pay more for a multiple for higher multiple rather for a company that has no real net income.
Right. You know, certainly in a short term period when people have expectations. But over the longer term, you know, those things are going to work out. And so you have to think about, okay, well, do I think that those things can sustain and I'm willing to pay 58 times and that's possibly going to be fine to pay 58 times it can work out.
But it is expensive. And that's one of the criticisms that ServiceNow gets is that it's a fabulous company right now. It's really well run by Bill McDermott. They're in a great space and they continue to moving in a great space. But lots of people know that. And that's reflected in these 58 times. The 58 times multiple on the price earnings.
So something we have to think about. But let's look at let's look at it over time. Also the same thing we talked about. Okay. Well don't look at just now. And certainly the forward numbers is where we want to do. Where has it been over time? Where has the market assessed this number over time? Just to get some context of where it's been.
So the, you know, the high over the last ten years has been really, really high, 870, the low 76. And so it hasn't really traded super low. The average 309 in the median is 268. And so you're talking about super high numbers right. And so if you look at it relative to its own history, it does not look expensive.
In fact, it looks like, okay, fairly priced and possibly even cheap at 58 times. Now, can it continue to grow? Right. It's a $200 billion market cap company. Can it continue to, you know, have a higher, you know, growth number in that revenue? Well, the projection is the consensus is that it slows down, you know, back in 2021, you're doing 30%.
You're doing 21% in the last 12 months in March. And you're projected to do 18% for the next two years. Well, that's going to impact what we pay on the multiple side. So it's really important to think about that. It's really important as an analyst, business person, to investor to be thinking, okay, well where do I think that's going?
You know, you got to you got to make it up in earnings or you got to make it up in the multiple. Right. That's how you're going to get paid as an investor. And what's the you know the earnings is set by the company the multiples set by the market. But the multiples set by the company as well.
On how they're going to really when you think about the growth in net margins, what are people willing to pay for those earnings right. Price earnings. So the market sets the price earnings but the company sets the earnings. Right. And so when you think about the net income, can they drive higher net income? So when we look down here at the net income that's what they call the bottom line.
You know they're growing and projected to grow that. So the sales are coming off. And so the top line number is kind of flattening out right now. The growth in the top line number not not the overall but the growth that that the number is growing but at a slower pace. So now we have to think, okay, well do we think that's going to happen?
So that that is something as an analyst you really have to consider, you really have to think about. But paying 58 times may seem unreasonable to some. But if you look at the the trajectory of the company in the space that it's in, possibly you're willing to pay that. We obviously paid it on the way in. And right now we have to decide what we're going to continue to do with it.
All right. So I think on the on the valuation side, obviously you're going to dig it there. Probably give it a six and a half. You know you got to pay up. But it's a great company. And you know that's the case. So let's say six and a half on that. So moving on to the balance sheet now.
So if you talk about the balance sheet it's another it's another place where this is a really, you know, a strong point. So you got $6.5 billion of cash and cash equivalents in about $2.4, in, in debt. So let's just round it. $4 billion in net cash, no problem. Generating $3.6 billion, in free cash flow.
So you're not really worried at all about the balance sheet? If you watched the blooper reel recently, thank you to Danielle Lucero who put that together. This will help us sleep at night. And so the balance sheet for sleeping like babies for sure on this one. No problems. They've been super responsible about a 60 times interest coverage ratio.
So Ebit earnings before interest and taxes over interest and generating, again, a lot of free cash flow. And they've been super responsible. Again, we said, look at this. Over time the cash and cash equivalents has gone from $3 billion to $6.5 from 21 to 25. And the the debt has basically stayed at the same $2.2, and year over year about the same.
Now it's $2.4. So in that net cash position has increased, free cash flow has increased, interest coverage ratio has increased. All those things helps us sleep at night again. Sleeping like babies here with ServiceNow on the balance sheet, you can give this a nine or even a ten out of ten. Not worried at all.
So we'll pull all those scores together. Obviously the balance sheets, easy to do and fast when when the numbers look like that. But we pull those numbers together. You're going to get a high number. Right. And so when you talk about the business as an eight, the management as an 8 or 9, when you talk about, the valuation being a little high, maybe give that a six and a half and then you give it 9 or 10 on the balance sheet, you know, you're still talking, let's say be conservative.
You're going to come up with about an eight number, right, or 7.75 to 8 depending on how you you come out on those scores. So this is a good business. Does it turn into a great business? That's something as our analysts, our analysts need to watch for and look out for. That's what we're going to be doing this fall semester.
We'll be watching ServiceNow. If you're going to be paying attention to ServiceNow, some of the things that I think you should be paying attention to, and we will as well, is what are they doing on the sales numbers? What are they doing on the net income numbers? And what are they going to be doing the capital allocation, the growth organic? And what are the acquisitions gonna be? Pay close attention to Bill McDermott and what he is saying.
Listen to those earnings calls. I encourage you to do that. We'll be doing that and doing our analysis. And our students will be doing great work this fall semester, I am sure. Thanks again to everybody who makes this show happen. That's a wrap for this episode. We'll see you back on the next episode of “Market News with Rodney Lake.”
Thank you.
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