The view has been all around for quite some time now Palantir Technologies (NYSE:PLTR) was somewhere between a generational software developer or an “AI cheater,” depending on who you ask. One of the biggest reasons for this polarizing view is that many investors simply don’t understand what Palantir actually does.
Juxtaposing industry buzzwords like “AI” and “data-driven insights” will only get you so far. At some point, a company has to prove that its marketing tactics are paying off. And in fact, Palantir has witnessed a new wave of growth over the past year thanks to its suite of data analytics software platforms.
The company has not only accelerated its sales, but has also consistently increased profit margins and transitioned from a money-burning business to a profitable one. Palantir recently became a member of the S&P500 and works closely with some of the largest established players in the technology sector, including Microsoft And Oracle.
Today, another company in this sector also deserves a closer look: ServiceNow (NYSE: NOW). Ever heard of it? I’m going to detail how ServiceNow is quietly disrupting the world of enterprise software, similar to what Palantir has done. Additionally, I will explore how AI plays an important role in the company’s current growth trajectory and assess whether this is a lucrative stock acquisition opportunity.
What does ServiceNow do?
About a year ago, ServiceNow CEO Bill McDermott sat down for an interview with David Rubenstein – a private equity investor and former policy advisor during President Jimmy Carter’s administration.
When asked what ServiceNow actually does, McDermott simply referred to the company as the “IT backbone” for companies looking to build out a digital infrastructure. While I appreciate the metaphor here, I have to admit that this explanation is still a bit vague.
Let’s look at an example to better understand the ServiceNow platform. From finance, sales and marketing, business operations, human resources to IT management: companies have a separate department for almost everything. As a result, workflows in the organization can be slow and employees can wait hours or even days for an optimal solution.
That’s where ServiceNow comes into the picture. The company offers a comprehensive suite of SaaS-based tools and services intended to help streamline generic inefficiencies within organizations. This allows employees and team members to better track the status of important issues or projects, ultimately leading to higher productivity.
Image source: Getty Images.
How is AI a tailwind for ServiceNow?
Like many software companies, ServiceNow wants to ride the AI wave. And at first glance, the company appears to be doing well. Since AI became the talk of the town, ServiceNow has signed a number of high-profile partnerships with Microsoft, IBMAnd Nvidiajust to name a few. But like I said, marketing strategic alliances and doing highly publicized interviews are only part of the story.
How is ServiceNow’s business actually performing? Pretty sturdy, if you ask me.
NOW earnings (quarterly) data by YCharts
As shown in the chart, ServiceNow’s revenue and gross profit margin have increased significantly in recent years. Delving deeper into this, we look at the growth trends starting in 2023 – roughly the period when AI started landing on more radars.
Just over the last twenty months, ServiceNow’s revenue line is starting to see a noticeably steeper slope, while profit margins are simultaneously increasing. What’s even better is that the combination of faster sales and wider margins leads to consistent profitability – both from a net profit and free cash flow perspective.
Are ServiceNow shares a buy now?
While ServiceNow is consistently profitable, the size of its net income and cash flow fluctuates quite a bit. Remember that ServiceNow is a growth company, so it continually reinvests excess profits back into the business.
For this reason, using earnings-based valuation metrics such as price-to-earnings ratio (P/E) or price-to-free cash flow (P/FCF) is not entirely useful. Instead, I’m going to look at the ratio between enterprise value and revenue.
NOW EV to Sales Data by YCharts
Currently, ServiceNow is trading at an EV-to-sales multiple of 18.6 – essentially in line with its five-year average. But if you take a closer look at the overarching trends, you can get a lot out of these graphs.
After a brief surge in 2020, both ServiceNow and Palantir’s valuation numbers fell quite significantly between 2021 and 2023. Much of this was due to macro factors such as inflation and rising interest rates, and their toll on the enterprise software market as a whole.
However, as the AI era came into view around 2023, ServiceNow and Palantir started witnessing some valuation appreciation. What’s special is that even with this valuation increase, ServiceNow’s EV-to-revenue is actually back to where it was a few years ago.
Considering that ServiceNow is a much larger, profitable company today compared to 2020, I think an argument can be made that the stock is undervalued – despite the gradual increase in valuation over the past two years.
To me, the market is starting to understand ServiceNow, more or less like Palantir. However, I still think that ServiceNow is not yet fully appreciated in terms of how it plays an integral role at the intersection of AI and enterprise software.
For these reasons, I think now is a good time to buy shares of ServiceNow, and I see the company following a story and trajectory very similar to Palantir’s as the AI story continues to take shape.
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Adam Spatacco holds positions at Microsoft, Nvidia and Palantir Technologies. The Motley Fool holds positions in and recommends Microsoft, Nvidia, Oracle, Palantir Technologies and ServiceNow. The Motley Fool recommends International Business Machines and recommends the following options: long calls for $395 in January 2026 at Microsoft and short calls in January 2026 for $405 at Microsoft. The Motley Fool has a disclosure policy.