ServiceNow's $12B Acquisition Spree Marks Strategic Pivot Amid Valuation Concerns

What happened

ServiceNow has abruptly abandoned its long-standing aversion to large mergers, embarking on a $12 billion acquisition spree in 2025 to bolster AI and data capabilities. The DeepValue report highlights ServiceNow's robust franchise with 97% recurring revenue and strong free cash flow, but its stock trades at rich multiples of 92x P/E and 72x EV/EBITDA, 244% above a conservative DCF estimate. This aggressive move, echoing CEO Bill McDermott's past at SAP, aims to accelerate growth in competitive AI markets but introduces heightened integration risks and potential for capital misallocation, as flagged in the report's M&A warnings. Despite operational strengths like 24% YoY RPO growth to $24.3 billion, the stock has fallen 29% over the past year, reflecting investor skepticism over lofty valuations and execution challenges. The spree signifies a sharp strategic shift to defend and expand its moat, yet it amplifies existing pressures from valuation, competition, and margin compression.

Implication

Investors must monitor the integration of acquisitions like Moveworks and data.world closely, as failures could lead to write-downs and erode the premium valuation. The $12 billion outlay may pressure cash reserves or increase leverage, potentially limiting future share buybacks despite a net cash position. If successful, these deals could enhance ServiceNow's AI offerings and competitive edge, possibly justifying higher growth expectations. However, given high stock-based compensation and margin pressures, added M&A complexity might further dilute earnings and strain operating efficiency. Overall, this reinforces the need for patience, as the stock's rich pricing leaves little room for error amid rising uncertainties.

Thesis delta

The original 'WAIT' thesis was based on valuation risks and growth deceleration; the acquisition spree adds execution and capital allocation risks that could worsen margin pressures. However, successful integration might boost AI monetization and competitive strength, though the current price already assumes near-perfect outcomes. Thus, the core cautious view remains intact, with heightened scrutiny on M&A performance required.