• DOGE Revelations about inefficiency are raising concern about ServiceNow’s government contracts and customer management.
• The company’s Q4 results showed solid growth, but a cautious 2025 forecast and slower-than-expected growth of subscription revenue have tempered investor enthusiasm.
• Despite the recent 30% correction, its lofty valuation remains a tough sell. A weak forward guidance is casting doubt on whether the premium is still warranted.

The federal government has been paying for thousands of scarcely used software licenses, including over 35,000 from ServiceNow (NOW), a leader in AI-driven enterprise workflow automation. That revelation from Elon Musk’s Department of Government Efficiency (DOGE) has sparked discussion among investors concerned about what the audit says about the company’s business model.

However, the scrutiny by DOGE doesn’t capture the full picture of the ServiceNow’s recent performance or its long-term potential. With its market cap falling by about 30% from 52-week highs, the company’s valuation provides a fascinating case study. Let’s delve into the financials and see whether the stock’s current price is a compelling investment opportunity or if the market’s cautious outlook is warranted. 

A leader in AI-driven workflow automation

ServiceNow operates in the rapidly evolving enterprise software market, providing cloud-based services designed to automate and streamline business workflow. By offering a broad suite of applications, the company enables businesses to manage complex processes in multiple departments—all through a single, unified platform. Initially known for its IT service management (ITSM) offerings, it has expanded its platform to include IT operations management (ITOM), governance risk and compliance (GRC) and customer service management (CSM). This platform-as-a-service (PaaS) model provides the flexibility necessary to automate workflow, boosting efficiency and reducing manual intervention.

A devotion to innovation sets ServiceNow apart from competitors. The company has made strategic acquisitions to strengthen its AI capability , such as the recent $2.85 billion acquisition of Moveworks, an AI startup specializing in customer service automation. It has also integrated AI agents into its Pro Plus offerings, enhancing its ability to drive automation and optimize decision-making. Additionally, it has deepened its partnerships with dominant cloud providers like Oracle (ORCL) and Google Cloud from Alphabet (GOOG), ensuring seamless integration across cloud technologies. Through these strategic moves, ServiceNow is solidifying its grip on the future of enterprise efficiency.

But despite its strengths, ServiceNow faces stiff competition in the enterprise software segment. Companies like BMC Software (BMC), IBM (IBM) and Microsoft (MSFT) offer their own IT service management and workflow services, with some focusing on specific industries or functions. For example, tools like Jira Service Management, Freshdesk and Zendesk cater to customer service needs, while larger players like Microsoft bring vast resources and integrated product suites. While ServiceNow stands out with its ability to customize and scale across a wide range of workflows, its competitors provide strong alternatives, especially for businesses with targeted needs.

Strong earnings, but softening outlook

In its fourth-quarter 2024 earnings report, ServiceNow delivered solid performance, with total revenue reaching $2.9 billion, a 21% increase year-over-year. The company reported impressive customer growth, with 2,109 customers generating more than $1 million in annual contract value (ACV), a 12% increase from the same quarter a year ago. The number of customers with over $5 million in ACV also grew by 21%, underscoring the strength of ServiceNow’s enterprise offerings. The company’s remaining performance obligations (RPO), a key indicator of future revenue, climbed 23% year-over-year to $22.3 billion, indicating robust demand for its services.

Despite these strong topline figures, ServiceNow’s stock dropped by about 14% following the earnings release because investors were seemingly disappointed by the company’s 2025 outlook. Projected growth of subscription revenue between 18.5% and 19% was below Wall Street’s expectations. Plus, the company’s shift toward consumption-based pricing for its AI and data services also raised concern about the near-term effect on revenue recognition. It is prioritizing AI adoption with a focus on its Pro Plus and Enterprise Plus offerings, but the transition to this new pricing model is expected to create revenue volatility in the short term. 

A shift in federal spending adds another layer of uncertainty to the forecast. Especially considering the DOGE discovery related to unused ServiceNow licenses. Overall, the market’s negative reaction to the Q4 report underscores the challenges the company faces in balancing short-term revenue expectations with its long-term growth strategy. Investors seem to be cautious about how quickly the company can transition to its new pricing model and monetize the full potential of its AI innovations.

Despite 30% pullback, valuation remains elevated

Looking at broader performance in the company’s shares, the stock is down about 30% since peaking in late January. Some of this decline is clearly attributable to the recent pullback in the broader stock market. Regardless, this decline has shaved $75 billion from ServiceNow’s market capitalization, taking it from $245 billion to less than $170 billion. With such a dramatic drop, it’s the perfect time to reconsider the company’s valuation—especially in light of the underwhelming guidance for 2025. 

ServiceNow currently trades with a forward GAAP price-to-earnings (P/E)ratio of nearly 100, a far cry from the sector median of 28. This implies investors are willing to pay a hefty premium for the company, betting the growth story will continue to unfold at a breakneck pace. Unfortunately, other valuation multiples also point to an overextended valuation. The company’s enterprise value-to-sales (EV/S) ratio is 14—over four times the sector’s 3—and its price-to-book ratio is 17, compared to the sector’s 3. Even the price-to-sales ratio at 15 is significantly above the sector’s 3. These figures suggest the company is priced as though it’s already delivering the next big thing in AI, even though it’s still finding its footing in many respects.

Despite those elevated multiples, Wall Street remains decidedly bullish on ServiceNow. Of the 45 analysts covering the stock, 38 rate it a “buy” or “overweight,” with an average price target of $1,160—well above the current price of $84 per share. The company’s long-term prospects in AI-driven workflow automation seem to be driving this optimism, and with a healthy pipeline of large-scale deals, there’s no doubt ServiceNow could emerge as a leader in this sector. However, the disappointing guidance has put a damper on the short-term outlook, leading some to wonder whether the stock’s valuation truly matches up with its near-term reality. 

The bottom line: ServiceNow’s valuation is built on the assumption of continued strong growth, but recent price action suggests the market is adjusting its expectations. While the company’s AI capabilities and long-term prospects remain promising, investors should consider whether the stock’s hefty price tag is still justified. The combination of a broader market sell-off and weaker-than-expected guidance indicates it may no longer warrant the premium it commanded just a month ago.

Investment takeaways

ServiceNow continues to lead the charge in AI-driven enterprise automation, tapping into the surging demand for efficient, streamlined workflow across industries. Its long-term growth prospects remain compelling, fueled by its strong position in a rapidly evolving market. Yet, the sharp decline in its stock price has raised questions about whether its sky-high valuation still holds water. 

If the tech sector experiences a near-term rebound, ServiceNow could benefit from a broader wave of optimism. But with its P/E ratio above 90, EV/S ratio at 14 and P/B ratio at 17, it’s tough to justify further inflation in its valuation until its earnings outlook aligns with expectations. While analysts remain optimistic, weak guidance and the broader market uncertainty make a sharp recovery unlikely in the short term. In other words, while ServiceNow’s trajectory looks promising, the 30%+ discount on its valuation—prompted by Q4 earnings and a broader market sell-off—might be warranted. 

Andrew Prochnow, Luckbox analyst-at-large, has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader.