This AI Stock May Be the Biggest Winner as Enterprise AI Takes Off
Key Points
ServiceNow's nearly 9,000 clients include roughly 90% of the Fortune 500, and the governments of almost all of the 50 U.S. states.
AI costs aren't fixed and have been rising as agentic AI demand heats up. That extra demand has resulted in customers upgrading their ServiceNow subscriptions.
The company has a long history of delivering higher than 20% year-over-year revenue growth while remaining profitable.
ChatGPT revolutionized how people saw the artificial intelligence (AI) opportunity, and enterprise AI may be the next frontier. Agentic AI can perform various tasks for businesses and consumers, rather than stopping at just providing information.
The biggest winner of the agentic era of enterprise AI may be a company that isn't a household name yet. ServiceNow (NYSE: NOW) has 90% of the Fortune 500 as its customers and has become the leading platform for workflow creation.
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ServiceNow's vast customer portfolio gives it a massive head start
AI costs aren't fixed. They are rising over time, which explains why hyperscalers have been raising their capital expenditures. All that capital has to go somewhere, and tech giants prefer to rely on trusted sources rather than trying things out with new emerging companies.
That positions ServiceNow well. Not only does it already serve most Fortune 500 companies, but it also has nearly 9,000 enterprise customers. Each time those customers invest more heavily in their AI ambitions, it increases the likelihood that those same enterprises will upgrade their ServiceNow plans.
Its second-quarter results indicate that this phenomenon is already taking place. Overall revenue increased by 24% year over year in the period, but growth was primarily driven by ServiceNow's largest customers. For instance, it saw 123 new transactions exceeding $1 million in net annual contract value in Q2, a 40% year-over-year increase. It also saw a 23% year-over-year increase in the number of customers with more than $5 million in annual contract values.
ServiceNow also announced expanded partnerships with Nvidia, Microsoft, and Amazon. That lineup, plus the fact that state and local governments in almost every U.S. state use the ServiceNow AI Platform, gives the company a large market position that outpaces the competition.
When agentic AI costs rise, many of the big spenders will naturally turn to ServiceNow. It's no wonder Nvidia CEO Jensen Huang said "the market's got it wrong" about the stock, which is down by about 15% year to date.
ServiceNow operates on an annually recurring revenue
ServiceNow customers pay via monthly and annual subscription plans, which makes it easier for the company to deliver exceptional growth rates each year. Its ability to add new customers while commanding higher annual contract values for its existing customers makes it easier to forecast future growth.
That business model has also helped ServiceNow remain durable in various economic cycles. For instance, over the past decade, its compound annual revenue growth rate was 29.4%. The company is maintaining a similar pace, with 24% revenue growth in Q2.
Not only did Huang say the market was wrong about ServiceNow, but he also said it was "destined to be the best platform." That type of commentary from Nvidia's CEO is a big deal since Huang has more data about what's going on in the AI trade than almost anyone else. Every AI company wants to secure a partnership with Nvidia, and Huang singled out ServiceNow as the best option for enterprise AI.
ServiceNow's vast customer pipeline and remaining performance obligations support Huang's bold claim.
Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, Nvidia, and ServiceNow. The Motley Fool has a disclosure policy.