ServiceNow, Inc. (NYSE:NOW) closed at $140.86 on October 9. The stock has returned 58.1% during the last six months, compared to a 24.3% return for the Insider Monkey Billionaire Index and 15.1% for State Street SPDR S&P 500 ETF Trust.
A company can add a quarter to its revenue and still report less profit, and what it bought with the difference decides whether that is good news. ServiceNow is deliberately trading this year’s earnings for next year’s customers. The market has been content to fund that so far, which is itself part of the risk.
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The Gap Is Spending, Not Pricing:
A software company adding a quarter to its revenue and losing a fifth of its profit has spent the difference somewhere, and the first question is whether it discounted to win the business. It did not. Gross margin is 74.77%, so each dollar of new revenue still arrives with roughly three quarters of it intact. The pricing is holding.
The money disappears below that line, in sales headcount and engineering payroll. That is what buying growth looks like on an income statement, and the revenue figure says the buying is working.
The cash statement settles it. Free cash flow came in at nearly three times reported net income, so most of what reduced earnings never left the business. Stock-based compensation and amortisation do that, and both run large at a company hiring quickly. A company whose cash improves while its profit falls is usually worth more than the income statement says, and that gap is what we were looking at in the stocks we picked for high returns this year. The one we ranked first is up 24% since January.
So profit fell on the income statement while the cash position improved, which is a pairing that favours a patient holder.
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The Risk Sits in the Price, Not the Business:
Nothing above is an argument about valuation, and valuation is where the risk sits. The stock has returned more than double the index over six months, which raises the stakes on every assumption below. It trades at 28.14 times forward earnings on analyst consensus estimates, against a trailing multiple near ninety, and that forward figure assumes the spending stops suppressing profit while the growth rate holds. Both of those have to happen. If growth slows to the high teens while the sales investment continues, the earnings recovery arrives late, and the multiple has a long way to fall.
The balance sheet is the one genuinely tight spot. A cash balance well below the debt load gives a current ratio of 0.70. That is not dangerous for a company generating this much cash, and it does remove the option of absorbing a bad year cheaply. Enterprise software is also the segment most exposed to the argument that artificial intelligence compresses seat-based pricing, which is exactly where ServiceNow earns its revenue. Growth bought with payroll has to outlast the payroll, and the alternative is paying far less for growth somebody else already funded, which is the trade on offer across the quality names we found trading under their worth.
The Valuation Case:
The honest verdict is that ServiceNow looks expensive on anything reported and defensible on cash. A trailing multiple near ninety leaves no room if the growth rate slips, and the forward multiple of 28.14 is only reasonable if both the growth and the margin recovery arrive on schedule. You are paying for the assumption that enterprises keep consolidating workflow software onto one platform.
Price-to-book above eleven tells you the market is valuing the software and the customer relationships rather than anything on the balance sheet. That is appropriate, and it also means there is no floor underneath the valuation. Everything selling into the artificial intelligence buildout carries that same shape, including the semiconductor names billionaires have been buying, where the one they hold most of is up 18% since June.
Conclusion:
Nothing in these accounts suggests customers are leaving. Revenue grew strongly at a software gross margin, and free cash flow came in at nearly three times reported net income. However, the operating margin is a small fraction of the gross margin, due to sales and engineering payroll. The forward multiple needs both the growth and the margin recovery to arrive. Everything rests on the operating margin, which decides whether the spending ever turns into profit.
Market Sentiment:
ServiceNow, Inc. was held by 115 hedge funds with a combined stake value of about $5.05 billion at the end of Q2 2026 in the Insider Monkey database. This is up from 108 hedge fund holders with a cumulative investment value of around $5.45 billion in the previous quarter.
While we acknowledge the risk and potential of NOW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NOW and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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This article is originally published at Insider Monkey.
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