NOW Analysis: ServiceNow's $109 Billion SaaS Empire Is Down 51% From Its High — Why the AI Panic Selloff Ignores $4.6 Billion in Free Cash Flow

ServiceNow currently trades at a PE ratio of 62.4x trailing earnings, which sounds expensive in isolation but represents a dramatic compression from the 138x multiple the stock commanded as recently as mid-2025. The price-to-sales ratio has fallen from 66x to 44.6x, while the price-to-free-cash-flow ratio sits at roughly 24x on an annualised FY2025 basis — the lowest in ServiceNow's history as a mega-cap software company.

The enterprise value-to-EBITDA multiple of 210x reflects GAAP accounting that includes nearly $2 billion in annual stock-based compensation. Stripping out SBC, ServiceNow's adjusted operating margin is closer to 30%, which reframes the valuation considerably. At $109 billion in market cap with $4.6 billion in free cash flow, the company trades at roughly 24x FCF — a valuation more commonly associated with mature industrials than a 23% revenue grower.

The price-to-book ratio of 12.3x reflects the asset-light nature of the SaaS model, where the real assets — customer relationships, platform stickiness, and switching costs — don't appear on the balance sheet. ServiceNow's net revenue retention rate has historically exceeded 120%, meaning the existing customer base expands even before new logos are added.

ServiceNow delivered remarkably consistent results throughout fiscal 2025, with revenue accelerating from $3.09 billion in Q1 to $3.57 billion in Q4 — a sequential growth pattern that demonstrates sustainable demand rather than front-loaded deal timing.

Gross profit margins remained robust throughout the year, ranging from 76.6% in Q4 to 78.9% in Q1, with the slight decline reflecting seasonal patterns in professional services mix rather than competitive pricing pressure. The gross margin consistency is critical — it signals that ServiceNow is not discounting to win deals despite the broader software downturn.

Quarterly net income showed some variability, from $385 million in Q2 to $502 million in Q3, with $401 million in Q4. The Q4 figure included elevated SG&A expenses of $1.52 billion (up from $1.28 billion in Q1) related to the company's expanded go-to-market push around its AI-powered Now Assist product suite. For the full year, net income reached $1.75 billion, up 23% from FY2024's $1.43 billion.

Diluted EPS came in at $0.38 in Q4 and $1.67 for the trailing twelve months. The EPS growth trajectory has been less dramatic than revenue growth due to rising stock-based compensation costs, which totalled $1.96 billion in FY2025 — a figure that equity analysts increasingly scrutinise but that also reflects ServiceNow's ability to attract top engineering talent in a competitive AI labour market.

ServiceNow's balance sheet is a fortress by software industry standards. The company ended Q4 2025 with $3.73 billion in cash, $2.56 billion in short-term investments, and $5.32 billion in long-term investments, totalling $11.6 billion in liquid assets. Against $3.2 billion in total debt (including $800 million in capital lease obligations), ServiceNow maintains a net cash position of $523 million.

The real story, however, is cash flow generation. Free cash flow has grown at a compound annual rate of 28% over the past three years:

Operating cash flow hit $5.44 billion in FY2025, up 28% from $4.27 billion in FY2024. Capital expenditures were a modest $868 million, yielding an FCF conversion rate of 84% — an extraordinary figure for a company at this scale. Management deployed $1.84 billion in share buybacks during 2025, nearly tripling the $696 million repurchased in 2024.

Deferred revenue — a leading indicator of future recognised revenue — stood at $8.43 billion ($8.31 billion current, $120 million non-current) at year-end. This represents roughly 7.6 months of forward revenue visibility, providing a substantial cushion against any near-term booking slowdown. The debt-to-equity ratio of 0.25x and interest coverage that effectively approaches infinity (the company earned more in interest income than it paid in interest expense in every quarter of 2025) leave ServiceNow with significant balance sheet flexibility for M&A or accelerated buybacks.

The irony of ServiceNow's 51% decline is that the company is arguably one of the best-positioned enterprise software vendors to benefit from AI adoption, not be displaced by it. ServiceNow's Now Platform sits at the centre of enterprise IT operations, HR, and customer service workflows — precisely the processes where AI copilots and agents deliver the most immediate productivity gains.

The Now Assist suite, launched in late 2024, has been adopted by over 1,000 enterprise customers, embedding generative AI directly into the ServiceNow workflow engine. This is a critical distinction: ServiceNow is not competing with AI — it is the delivery mechanism through which large enterprises consume AI. Every AI feature drives deeper platform entrenchment and increases the switching cost for the 85% of Fortune 500 companies that already run on ServiceNow.

ServiceNow's competitive moat rests on three pillars. First, workflow lock-in: once an enterprise builds its ITSM, ITOM, HR, and customer service processes on the Now Platform, migration costs are prohibitive. Second, the platform model: ServiceNow's single-architecture approach means new AI capabilities propagate across all modules simultaneously, unlike point solutions that require separate integrations. Third, the data advantage: ServiceNow processes billions of enterprise workflow events, giving its AI models proprietary training data that no standalone AI company can replicate.

The market's fear is that large language models and AI agents will render ServiceNow's workflow automation redundant. But this fundamentally misunderstands enterprise software buying — CIOs do not replace platforms that work; they add capabilities to them. ServiceNow's FY2025 results, with 23% revenue growth in the teeth of a software downturn, suggest customers agree.

Wall Street consensus projects ServiceNow's revenue to continue compounding at approximately 15-18% annually through 2028, with quarterly revenue estimates reaching $5.3 billion by Q1 2028 and $6.0 billion by Q4 2028. If realised, this would represent annual revenue approaching $23 billion — nearly double the FY2025 figure.

Estimated EPS for 2028 quarters ranges from $1.40 to $1.65, implying annualised earnings of roughly $6.10 per share — a significant step-up from the current $1.67 TTM figure. At today's $104.27 price, that puts the forward 2028 PE at approximately 17x, which would represent a deep value multiple for a company of ServiceNow's quality.

The next earnings report is scheduled for April 22, 2026, which will be the Q1 FY2026 report. Key metrics to watch include subscription revenue growth (the highest-quality revenue line), remaining performance obligations (RPO) growth, and commentary on AI-driven deal acceleration.

Risks are real but bounded. A prolonged enterprise IT spending freeze could slow bookings growth. Stock-based compensation at 15% of revenue dilutes existing shareholders. And a broader rotation out of growth stocks into value could keep the stock depressed regardless of fundamentals. However, the business risk — that ServiceNow's platform becomes obsolete — appears minimal given the FY2025 results and the company's aggressive pivot toward embedding AI as a feature rather than fighting it as a threat.

ServiceNow's decline must be understood in the context of a sector-wide rout. The broader SaaS complex has sold off 30-50% from its 2025 peaks as investors rotated capital from software platforms into AI infrastructure plays (semiconductors, hyperscalers, and energy). The narrative — that AI agents will replace enterprise SaaS — has created indiscriminate selling pressure.

Unusual options activity underscores the intensity of bearish sentiment. On February 20, traders purchased 105,381 put options on NOW, a 69% spike above the average daily volume of 62,339 puts. This level of hedging activity typically precedes either capitulation or a major inflection point.

Yet the fundamental case for ServiceNow has arguably strengthened during the selloff. Recent quarterly results from peers like RingCentral and Five9 showed that AI is actually boosting enterprise software bookings, not cannibalising them. As Motley Fool noted in a February 19 analysis, ServiceNow represents "a growth stock down 30% in 2026 to buy and hold" — the kind of high-conviction, fallen-growth-at-a-reasonable-price opportunity that the market creates once or twice a decade.

For patient investors, the question is not whether ServiceNow is a good business — $4.6 billion in free cash flow and 23% revenue growth answer that definitively. The question is whether the current price already discounts a reasonable bear case. At 24x free cash flow with a net cash balance sheet and accelerating AI adoption, the risk-reward tilts decisively toward the bulls.