Transcription
Is Service Now truly cheap and truly undervalued? Here's what no one talks about. Welcome back to the Value Investor Show. Today, I'll talk about what Service Now actually does, their financials, their latest news, and I'm going to go through insider trading as well as price targets for this year. Then, I'm going to go through the intrinsic value of the company.
But before I do, I'm actually super close to selling AMD. I'm now up 6x in one year. I don't think this is sustainable. It really feels like a bubble. While I believe in the technology, in AI, in its ability to really transform the way we do business, life, and everything in between, I don't think the current situation with AI stocks being traded this high, as well as others like energy, copper, and everything else. While you have SAS companies, retail companies trading at 52-week lows.
As always, you can get 15% off Fiscal AI using my code below for a limited time only. I use Fiscal AI in everything that I do, from researching, looking at financials, and most importantly, looking at transcripts and earnings results.
Now, what does Service Now actually do? Well, imagine your school has 1,000 students and 100 teachers. And every day, problems pile up. The printer is broken. A student needs a new laptop. A teacher wants to book a room. The IT guy needs to approve all these requests. Everyone is emailing each other, filling in paper forms, chasing people, and it's total chaos.
Now, imagine someone builds one giant magic notice board where every request goes in automatically, gets sent to the right person, gets tracked, gets resolved, and nobody has to chase anyone. That is Service Now.
Service Now is basically an AI-power cloud platform that automates and manages all the digital workflows across the entire organization, from IT to risk and security, to human resources, and even CRM. So, if, for example, your Salesforce is the front door of an organization's IT, managing the customers and the sales, then Service Now is basically the back end; it's the thing that is running the house. It runs everything behind the scenes.
Who actually benefits from this? Well, Service Now serves 85% of Fortune 500 companies. These are the world's largest banks, hospitals, governments, and anything in between. Once a company is using Service Now, they never leave because the switching costs are enormous for this kind of automation. The backend automation, which is crucial, is very sensitive and also requires enormous training.
Now, there is a big advocate for Service Now, and that is Jensen Huang, the CEO of Nvidia, who called Service Now the AI operating system for the enterprise. Basically, what he's saying is that the AI model is becoming a commodity. LLMs are becoming a commodity, and the workflow layer on top of it is where the value is getting captured. And Service Now, owning that big chunk of Fortune 500 companies, can use AI their gentic business to really evolve their system and manage both humans as well as AI agents.
Another big advocate for Service Now recently is Jeremy Financial Education, who has sold his Adobe position and loaded up on Service Now, as well as CRM and other stocks. I don't think I agree with Jeremy solely on the fact that I do think that Adobe still has massive switching costs, and Adobe has always been a software for professionals, not for me, not for him, not for us in the room, but for professionals that have used Adobe's suite for the longest time, and all their creative assets are within the Adobe's ecosystem, and they cannot switch to any other companies. And I have talked to professionals in the industry, and everyone uses Adobe for a reason.
Now, let's dive into the financials of Service Now. So, Service Now is trading at a P ratio of 61, and a price of book to nine, and the Navy to sales of more than seven, and at the price to free cash flow of 22.7. Over the last one year, the company is down 50% from its all-time high. In fact, over the last three years, the company is down 5% and is down more than 55% from its alltime high. It has a market cap of $105 billion, almost 30,000 employees. Their gross margins at 76.6%, with their beta margins at roughly 24%, and they have almost no debt, with their debt to equity being at 0.2.
Now, the company has been growing quite nicely over the last 10 years alone. They have been growing at a kar of 25% in their revenues. They have been profitable since 2019, and their free cash flow has been growing at 31%. They're subject to grow at a similar pace through to 2028 and beyond.
Now, their return metrics on the other side, in my opinion, are good, but they're not that great compared to other SAS companies. For example, you have high single digits in things like return on assets, return on invested capital. And then you have low double digits on return on equity and return on capital employed. Compared to other companies like Adobe, like the Salesforce, and other SAS companies as well, these return metrics aren't as high as their competitors.
Now, one positive thing about Service Now is the fact that they have been profitable since 2019. They have consistently been increasing their operating margin, their operating leverage. Their gross profit margin has relatively stayed over 70%, with the best results approximately at 80%. And I think moving forward, we could see even higher gross profit margins as well as operating margins for the company.
And then finally, the company recently reported their Q1 earnings. And why this numbers matters is because they have also readjusted their target for 2030 to more than $30 billion in subscription revenue. Their subscription revenue for Q1 of 2026 was $3.6 6 billion, up 22% year-on-year, with their total RPO, their backlog basically, up 25% to $27 billion, and their fullear guidance at 15.7%, up 22% a full year, which is really good. I mean, they are growing much faster than other SAS companies, and this is probably, perhaps, why they're also trading at a premium compared to other SAS companies. However, it should be noted that that year-on-year growth has also slowed down a little bit. But as long as they're above 20% year-on-year growth in revenue, I think they will be trading at that premium.
Now, the backlog is important as well because this shows how the company will perform from their obligations in the future. These are basically money that have been committed by customers that haven't been recognized yet.
Then you have the AI that is accelerating inside the platform. Now, assist customers are spending over $1 million in annual contract value, which grew 130% year-over-year. AI is basically now turbocharging the core business. This is where the CEO currently is betting. This is what Jensen Huang has been saying. But AI is subject to really boost and give a new perspective to the now platform. The enterprise as well is getting bigger. Service Now had 16 transactions with more than $5 million in net new annual contract value in Q1 of 2026. Roughly 80% year onoveryear growth, which is very impressive. And it closes the quarter with 630 customers with over $5 million in ACV.
Now, this takes me to the latest news, the insider trading, as well as the price targets for this company, which are very, very important.
Starting off with the latest news, Service Now has established partnerships with Anthropic, with OpenAI, as of January 2026, to embed their LLMs into its AI platform, adding those agentic AI features. It goes back to my point of AI becoming a commodity for this company and using that commodity to further enhance their platform and their value to their clients. Service Now is basically becoming the layer that deploys everyone else's AI inside their back end of their enterprises. They also acquired our miss as they want to expand their total addressable market into cyber security and IT operations, making the company even stick here inside enterprise IT departments. We also had a furian states in Dubai, and we will look into the price targets themselves, but Bank of America recently reinstated a buy rating, highlighting Service Now's position as an AI beneficiary. And then finally, Service Now did set a $1 billion AI annual contract value target for 2026 and a faster free cash flow margin growth target for 2027.
Now, before we dive into the intrinsic value, let's have a look at insider trading and price targets.
Starting off with insider trading, there have been some sells as well as some buys. Most notably, Donald J. Trump bought into Service Now earlier this year. There have been, as I said, some buys and some sells, which really haven't flagged anything else apart from the fact that, of course, the US president has bought into Service Now, as well as, you know, the hund other companies that he has bought into. So, nothing major on recent transactions from politicians.
But then, interestingly, on insider trading on Q2 2026, there were five sales from insiders. On Q1 2026, there were four sales from insiders and two purchases. And then on Q4 2025, there were actually 15 sales from insiders. And when I'm talking about insiders, I mean management of the company, even more so in Q3 of 2025, with 42 sales and no acquisition. So, generally, insiders have been selling, dumping the stock, rather than buying at suppressed levels.
And then finally, on the price targets from analysts, there are 24 bullish or buy ratings from analyst, three neutral, and one bearish, with most analysts having a high as much of a $250 price target, on an average of $146, and a low of $85, compared to the current $100 share price per share that the company is now trading at. As you can see here, apart from Bank of America, there have been some other reratings by outperform, over way, market perform from other companies, which most of them actually estimating an upside from today's price.
And finally, I'm going to go through the intrinsic value and answer the question of whether Service Now is actually undervalued and cheap.
So, under my assumptions, over the next five years, ker, my base case assumes 19% revenue growth and 20% net income and free cash flow growth at a P ratio of 25. My bare case assumes that revenue will continue to grow, but there will be more decline, with revenue expected to grow at 15% and margins to remain the same. And then my bull case assumes that there is some improvement in growth as AI becomes a catalyst and continues to drive growth for the company, improving their revenue at 23% keer, and moreover, improving their margins and free cash flow margins at 25% keer growth over the next 5 years, with the P ratio at 30. Just so that I put it into perspective, under my base case, revenue is subject to grow to $31.6 6 billion by 2030, which is roughly just higher than what they currently expect.
Now, under my base case scenario, interestingly, the company is undervalued, but with a very minor marginal safety. The intrinsic value with the DCF method is $113, and with the EPS method at $14, the marginal safety is anywhere between 2 and 10%, which, in my opinion, is much lower than my target marginal safety of 50%, and something that I wouldn't necessarily go for.
Now, if we were to change this to the bulk scenario, the picture slightly improves, with the DCF method giving an intrinsic value of $137, and the APS method of $153 a share, giving a marginal safety of 26 to 33%. Under the bookcase scenario, under the assumption that the company now sees more growth, rapid growth, both in their top line and bottom line, compared to what they have done historically over the last two, three years. The marginal safety again is not enough. So, even at the bull case scenario, I would expect something more than 50%. Yet, the highest marginal safety here is 33%.
And that takes me to the bare case, because under the bare case, under the assumption that revenue and net income continues to grow, but at slower pace at what it has done historically, even though the company continues to grow, the intrinsic value with the DCF meadow is $93, and with APS metal at $67 a share, giving me no marginal safety and negative marginal safety, which means that the company is actually overvalued if the bare case was to materialize.
So, all in all, I don't think that Service Now is an undervalued company. I think that the company is priced to succeed in the AI revolution, with no guarantees for success. While you have other such companies that have a better risk-reward, in my opinion, and have very high switching costs, and that includes companies like CRM, Adobe, as well as others that I have mentioned in my previous videos.
Thank you so much for watching.