ServiceNow boasts a very large moat….
As the tech landscape evolves in 2025, ServiceNow (NOW) continues to shine as a leader in cloud computing and enterprise software, offering solutions that streamline IT operations and workflow automation. With its stock trading at $982.08 (as of June 18, 2025), investors are eager to determine if ServiceNow is fairly valued or poised for further growth. In this analysis, we evaluate ServiceNow’s intrinsic value using the Buffett and McGrew Valuation Methods, alongside its trailing 12-month (TTM) Return on Equity (ROE) and Return on Net Tangible Equity. We also highlight its formidable economic moat, a key factor for long-term investors. Let’s dive in to see if NOW is a screaming buy, hold, or overvalued. #StockAnalysis #Investing #ServiceNow
Intrinsic Value Analysis: Buffett and McGrew Methods
To gauge ServiceNow’s intrinsic value, we applied two robust valuation approaches: the Buffett Valuation Method (a discounted cash flow model inspired by Warren Buffett) and the McGrew Valuation Method, which accounts for dynamic growth in high-potential firms. Both methods leverage free cash flow (FCF), shares outstanding, and growth projections derived from five years of ServiceNow’s financial data. Calculations assume a current date of June 19, 2025, with a closing price of $982.08.
Buffett Valuation Method
The Buffett method employs a constant growth rate based on the 3-year FCF compound annual growth rate (CAGR). ServiceNow’s FCF grew from $2.17 billion in 2022 to $3.63 billion in 2024, yielding a 3-year CAGR of 29.2%. Since this exceeds 10%, we classify NOW as a growth stock and use a 10% growth rate for years 1–10. With a 2.5% perpetual growth rate and an 8% discount rate (4% Treasury + 4% premium), we project FCF, calculate a terminal value, and discount cash flows to present value.
- 2024 FCF: $3.63 billion
- Year 10 FCF: $9.41 billion
- Terminal Value: $175.37 billion
- Total Present Value: $121.34 billion
- Shares Outstanding: 206,979,000 (Q1 2025)
- Intrinsic Value per Share: $586.22
- Price with 25% Margin of Safety: $439.67
The closing price ($982.08) exceeds the overvalued threshold ($791.40, intrinsic value × 1.35), labeling NOW as overvalued under this method.
McGrew Valuation Method
The McGrew method, designed for growth stocks, uses a 5-year FCF CAGR (27.8%, from $1.36 billion in 2020 to $3.63 billion in 2024). Growth starts at 27.8% in year 1, declines linearly to 10% by year 7, and holds at 10% through year 10. The same 2.5% perpetual growth rate and 8% discount rate apply.
- 2024 FCF: $3.63 billion
- Year 1 Growth: 27.8%, declining to 10% by year 7
- Year 10 FCF: $16.07 billion
- Terminal Value: $299.56 billion
- Total Present Value: $201.19 billion
- Intrinsic Value per Share: $971.84
- Price with 25% Margin of Safety: $728.88
The closing price ($982.08) falls within the “Hold” range ($913.53 to $1,312.00), indicating ServiceNow is fairly valued under the McGrew method, which better captures its high-growth trajectory.
Valuation Status
The results are summarized in the following table:
| Stock Ticker | Valuation Method | Intrinsic Value per Share | Price with 25% Margin of Safety | Last Closing Price | Valuation Status |
|---|---|---|---|---|---|
| NOW | Buffett Valuation | $586.22 | $439.67 | $982.08 | Overvalued |
| NOW | McGrew Valuation | $971.84 | $728.88 | $982.08 | Hold |
The Buffett method suggests caution due to the stock’s premium pricing, while the McGrew method supports holding at current levels, reflecting optimism about NOW’s growth. #ValueInvesting #StockMarket
ServiceNow’s Economic Moat: A Buffett-Style Advantage
In Warren Buffett’s investment philosophy, a company with a wide economic moat—a sustainable competitive advantage—is a hallmark of long-term success. ServiceNow boasts a very large moat, driven by its dominant position in IT service management and workflow automation. Its platform is deeply integrated into enterprise systems, creating high switching costs for clients who rely on its customizable, scalable solutions. The network effect of its ecosystem, coupled with continuous innovation (e.g., AI-driven features), strengthens its market leadership. Additionally, ServiceNow’s subscription-based revenue model ensures predictable cash flows, further solidifying its defensive position against competitors. This significant moat bodes well for long-term investors, as it protects profitability and supports sustained growth, even in competitive tech markets. For those with a decade-long horizon, ServiceNow’s moat enhances its appeal as a resilient investment.
Financial Performance: ROE and Return on Net Tangible Equity
To assess ServiceNow’s capital efficiency, we calculated its TTM ROE and Return on Net Tangible Equity for the period ending 03/31/2025.
Return on Equity (ROE)
ROE measures profitability relative to shareholders’ equity:
- Net Income TTM: $1.54 billion (Q1 2025: $460M, Q4 2024: $384M, Q3 2024: $432M, Q2 2024: $262M)
- Average Stockholders’ Equity: $9.16 billion (average of five quarters from Q1 2024 to Q1 2025)
- ROE: (1.54 / 9.16) × 100 = 16.78%
A 16.78% ROE reflects solid returns on equity, competitive for a tech firm, though slightly below top-tier peers.
Return on Net Tangible Equity
This metric focuses on tangible capital by excluding intangibles:
- Average Goodwill and Intangible Assets: $1.49 billion
- Average Net Tangible Equity: $7.68 billion
- Return on Net Tangible Equity: (1.54 / 7.68) × 100 = 20.03%
The 20.03% Return on Net Tangible Equity underscores ServiceNow’s efficiency in leveraging tangible assets, a positive signal given its modest intangible asset base ($1.54 billion in Q1 2025). #FinancialAnalysis #TechStocks
Investment Implications
ServiceNow’s valuation presents a nuanced picture. The Buffett method’s conservative 10% growth rate flags NOW as overvalued at $982.08, suggesting value investors wait for a price near $586.22 or below $439.67. The McGrew method, leveraging NOW’s 27.8% FCF CAGR, indicates the stock is fairly valued, suitable for holding. The company’s wide moat, coupled with a 16.78% ROE and 20.03% Return on Net Tangible Equity, reinforces its financial strength and long-term potential.
For growth-oriented investors, the McGrew valuation and ServiceNow’s moat make it an attractive hold, especially in the expanding cloud automation market. However, its high P/E ratio (TTM: 133.25) and the Buffett method’s cautionary signal highlight valuation risks if growth falters. Long-term investors can take comfort in NOW’s competitive advantages, which position it to sustain profitability over decades. #InvestmentStrategy #CloudComputing
Notes and Limitations
- Data Sources: FCF, equity, and shares outstanding were sourced from ServiceNow’s quarterly financials. The closing price ($982.08) was assumed accurate but not verified externally.
- Assumptions: Used 5-year FCF CAGR for McGrew, 3-year for Buffett, with an 8% discount rate and 2.5% perpetual growth. Shares outstanding reflect Q1 2025 (206,979,000).
- Limitations: The 2024 FCF includes Q1 2025 data, potentially skewing estimates. The high FCF CAGR (27.8%) may overestimate future growth, though McGrew’s declining rate adjusts for this. Lack of external analyst forecasts limits growth validation.
ServiceNow (NOW) is a powerhouse in enterprise software, bolstered by a wide economic moat that promises durability for long-term investors. The McGrew valuation supports holding at $982.08, while the Buffett method advises caution, labeling it overvalued. With a 16.78% ROE and 20.03% Return on Net Tangible Equity, NOW demonstrates financial efficiency. Growth investors may find it compelling, but value seekers might await a dip. As cloud automation demand grows, ServiceNow’s moat positions it for sustained success. Keep an eye on this stock in 2025! #StockPicks #FinanceBlog
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