High Level Takes: ServiceNow
Each week I am going to pull from a premium subscriber research request and give a quick review with the aim to post a High Level Take. This will be shared on Substack and in the Discord. These will be brief, less refined, high level overviews of companies and their suitability as investments - ideally as a means for you to familiarize yourself and determine if its worth digging in deeper.
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This will be a refine as we go strategy so will improve/tweak over time and based on feedback to make the best version possible.
Please feel free leave any feedback in the comments.
ServiceNow, in my opinion, is basically the true “operating system” of modern businesses. If you work for a big company, it is a system that handles HR workflows, IT workflows/tickets, security, property etc. + CRM + data and KPI aggregation and dashboards.
It genuinely is an all in one platform. It creates automated workflows for enterprises and has been extremely effective at doing so.
Many of my larger partner organizations in real life, with $50m+ budgets use ServiceNow. For what it’s worth - they are clueless, you couldn’t pay them to be able to switch out of it.
NOW had a double beat and raise this Quarter: EPS up 26% and Revenue up 21%.
One of the prime “disruptor threats” to SaaS is the idea that AI agents/AI tools will make employees much more efficient and will eat away at seat based pricing.
I agree with this, this is a real threat. But, NOW has been one of the first companies to pivot. They are aiming to transition to an “outcome” based pricing model vs a seat based. What this means is that the customer is paying for the results which haven’t changed, or are better, not getting a discount because they need less people to do the work.
They have implemented a hybrid seat + AI assist pricing model that charges for AI token usage in work/outcomes. Plus - they are moving customers to higher product tiers that have AI assist packages and agents built into them.
In addition, NOW has embraced AI agents and is fully supporting the integration into their product. You can build agents on the platform and purchase agent add-ons from NOW. These are optimized for the product - good strategy here.
As usual, I don’t love the Share Based Comp here but it comes with the SaaS territory… what is important is that it is flattening and decreasing as a % of revenue.
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At the end of the day, in my opinion, ServiceNow isn’t going anywhere and is a structural part of large enterprise today.
I believe it will be one of the prime beneficiaries of AI/Agents layered into existing software, not disrupted by it. The company is already adjusting their pricing model to adapt and we will see continued efforts in this direction.
We are already seeing headlines about AI going ‘rogue’ on code and emails. What if ServiceNow becomes the workflow and oversight management tool FOR AI agents? The AI Control Tower.
NOW is trading at its lowest valuations ever, significantly below its average multiples. While it may take a while for multiples to expand, and I am not sure if they will ever reach the heights of former valuation, it is very attractive here if you are looking for a SaaS survivor/thriver.
Caveat - AI has increased uncertainty, tech advancements are rapid. No one has any idea what is over the horizon. As such, I am not sure when the re-valuation will come but if you are a long term holder this looks pretty good.
Conclusion: Reasonable Valuation
(Not going to say undervalued etc because I am not sure where re-rating will land with new AI landscape but I am pretty confident this is a good long term company here but there may be no catalysts in the short/medium term).
Hope this high level take helps! NOW is on my watchlist of companies I am interested in adding to the portfolio. I will be sure to let you know if and when I do.
Stay Sound!
Manu
Tickers mentioned in this post and price at time of writing:
NOW: $99.37
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