ServiceNow's 30% Stock Decline Highlights Valuation Risks Amid Growth Slowdown

What happened

ServiceNow's stock has dropped roughly 30% over the past year, as highlighted in a recent news article, reflecting market concerns over slowing revenue and macro headwinds. Despite AI momentum and strategic deals driving growth, the DeepValue report notes that the company faces decelerating expansion from a large revenue base and heavy stock-based compensation. The report confirms ServiceNow's strong fundamentals, including 97% recurring revenue, high renewal rates, and deep Fortune 500 penetration, underpinned by $24.3 billion in RPO. However, valuation remains elevated at ~92x P/E and ~72x EV/EBITDA, with the stock trading ~244% above a conservative DCF estimate even after the decline. This disconnect suggests the market is pricing in overly optimistic AI monetization assumptions, leading to a 'WAIT' recommendation due to a thin margin of safety.

Implication

The 30% price drop underscores a market reassessment of growth expectations, emphasizing that high multiples are unsustainable without accelerated AI monetization or margin improvements. ServiceNow's AI initiatives and strategic deals provide upside potential, but execution risks, competitive pressures from hyperscalers, and regulatory headwinds could dampen results. Valuation metrics remain stretched, indicating vulnerability to further multiple compression if revenue growth slows more than anticipated or if SBC continues to dilute earnings. For value-sensitive investors, waiting for evidence of durable operating leverage, such as stabilized subscription margins and reduced SBC as a percentage of revenue, is prudent before considering an investment. Key items to monitor include RPO growth trends, AI customer adoption rates, and any security or regulatory incidents that could impact the platform's reputation and costs.

Thesis delta

The news article does not shift the core investment thesis but reinforces the valuation concerns outlined in the DeepValue report. The thesis remains that ServiceNow is a high-quality business with a rich price tag, advising a 'WAIT' stance until AI monetization translates into tangible financial improvements or the stock offers a wider margin of safety. However, if AI-driven growth accelerates significantly and valuation metrics compress closer to peer averages, it could justify upgrading to a more bullish view.