Is ServiceNow Secretly a Cybersecurity Stock?

It's been a minute since we have talked about ServiceNow. They have certainly been out of favor. The stock price has been down significantly since software SaaS apocalypse. But I actually still really like ServiceNow. Bill McDermott is my favorite CEO. He is. I love the glasses. And the CFO, Gina, I'm not gonna attempt the last name because… Yeah, you can. Mastantuono. You can do it. It's a great management team over at ServiceNow. Like the leather jacket, Gina. We're gonna show you a number of visuals from our research dashboard over at chipstockinvestor.com, where we analyze all of the businesses we talk about here on YouTube, but so many more, and you can too. Let's take a look at our investment thesis checklist. Yeah, we did actually a, not exactly a pre-earnings review of ServiceNow, the day of the Q2 2026 earnings report, but we did go over some highlights on this, just updating the thesis, our expectations. And one of the big things that we obviously have been looking for is those acquisitions to get them more into the cybersecurity industry. So we have that in our notes. It went into updating the thesis checklist, and so here it is for ServiceNow. Let's talk about this a little bit more in depth, specifically the cybersecurity part of the business, because we got some notable updates on this after those couple of acquisitions that were recently made. Make sure you check out chipstockinvestor.com. You can get access to that research dashboard. We're building out a bunch of new software improvements here in coming months, so you can get in now. What you mentioned about cybersecurity is interesting, Nick, because it seems that the market is definitely not valuing ServiceNow as a cybersecurity company, but they most certainly are, and there's some data to back that up. And this chart, of course, from our early March cybersecurity industry refresh. We have a couple videos on that, as well as probably a blog post that will be available on that high-level overview where we called out especially the big cybersecurity platforms as being the place you probably want to be long term. Of course, that definitely got fleshed out by the market when Claude Mythos-5, Project Glasswing was announced about a month later in early April. But here we are, ServiceNow. It is absolutely time to talk about ServiceNow as a cybersecurity company. And cybersecurity is kind of a big deal, 500 billion annual global spend or over that in 2026. ServiceNow is focused more on the right side of the chart with the acquisitions it's made, mobile and IoT security, endpoint and consumer, identity and access management, and application security, which is a small bubble right now, but with AI, that segment is absolutely going to grow bigger. That's where ServiceNow is going to sit. Let's walk through some quotes from CEO Bill McDermott about that cybersecurity business that proves that we should be taking ServiceNow seriously in cybersecurity. Here's the first one. ServiceNow already was a $1 billion plus cybersecurity business. That is growing. The risk and security business is actually, he says, the fastest-growing of the top 10 cyber companies in the enterprise, and he restated that once again. He's very emphatic about that. We're gonna show you the top 10 here in just a moment, but this is why cybersecurity is so important. Mr. McDermott said 2.2 billion agents entering the enterprise globally, new identities. That acquisition that they made of the company Veza maps access across human identities, machine identities, and AI identities. You could almost think of that similar to the Palo Alto Networks acquisition of CyberArk. Very similar rationale here with ServiceNow's acquisition of Veza. And then Armis, that's another acquisition that ServiceNow made. They already have seven billion devices that they're tracking in real time. So we've talked about this a number of times over at Chip Stock Investor. The more AI identities there are, the more edge users, the more cybersecurity is needed. And this is interesting to think about because obviously ServiceNow is an enterprise software company, so the market is pricing it as such, a future loser of AI. And if you think about where we're at in AI right now, the winners are very much centralized compute, data center-based compute. And so the big three cybersecurity companies, Palo Alto, Fortinet, CrowdStrike to a lesser extent, but they are cloud-based, cloud-native software, so it ultimately resides also in a data center. Those companies fall on the left-hand side of this chart. They've been deemed direct beneficiaries of things like that Claude Mythos and Glasswing Project. ServiceNow is making a bet that a lot of that AI will move to the edge, or edge AI, robotics, choose your favorite buzzword of future growth driver. So it's interesting to see this. The market still is not pricing in that happening for a lot of these companies, but that is what ServiceNow is essentially betting on. The right-hand side of this chart, that AI doesn't just stay housed within a data center for forever. It is going to move to the edge, and they would like to be there before the rest of the market figures that out. So that was really the gist of those acquisitions of Veza and Armis is that future where AI moves closer to the end user. Okay, Nick, time to mansplain to me what AI Control Tower is. I didn't think you would literally say that, but okay. That's probably what's about to happen, isn't it? Get ready. Yeah, so AI Control Tower is ServiceNow's product that allows its customers to basically get an overall view of all of their AI products, all of their AI agents in one single platform. That makes sense. ServiceNow started as IT service management, workflow management, and they think that that is a natural fit for these companies that are now using AI agents to augment their workflow. You can see it all from one place and control it all from one place, be that a human worker or an AI worker. AI Control Tower from ServiceNow gets it done for you. It's kind of like a control tower in an airport. Yeah. That's where they, I think, maybe came up with the name. That was much better than my mansplanation. Good job. Just wanna call out on this slide, they said that ServiceNow is now the eighth largest cybersecurity business in enterprise, and the fastest-growing. Let's show you what that looks like. Here's the top eight cybersecurity companies by revenue distribution. We chose these eight from our industry stock list, and we picked the top eight pure-play cybersecurity companies. Obviously, there are others like Broadcom, Cisco. The hyperscalers all have cybersecurity business, but this is narrowing the focus down to the actual pure-play platform cybersecurity companies. This is pretty much all they do. What does 10-figure mean? That means $1 billion or more in revenue. By this metric, I think we can infer ServiceNow would say they would displace, maybe Cloudflare or Check Point Software as the number eight company, maybe even Okta. I think they're essentially saying now with Veza and Armis and their path to growth, they're looking at something like two to three billion in sales in cybersecurity for 2026, 2027. So here is a look at the revenue for ServiceNow, and honestly, when I first looked at it, I thought this was annual revenue, but they have actually made a ton of progress. This is revenue by quarter. June 2026 quarter that just wrapped up, 4 billion in quarterly revenue. The 20%-plus revenue growth streak has continued into this most recent quarter, and the Q2 2026 revenue increased almost 25% year over year. So a small acceleration from prior quarters, which was of course helped in part by some of those acquisitions and increasing AI product usage. Okay. This slide from ServiceNow directly. Quick note on this. We're not gonna use this because these are adjusted metrics, not actual GAAP metrics. And, that seems to be pretty popular right now to just poke holes in a bull thesis because of these adjusted metrics. But we're just gonna show you the GAAP metrics and show you why the GAAP metrics are probably still pretty impressive. And yes, there are risks that need to be discounted in this business, but it's pretty trendy to poke holes in a bull thesis after the stock has declined, what are we down to? 50%, 60% down from all-time highs. Very much in a bear market for software. Easy to be a critic when the company is kind of down and left for dead. So let's play devil's advocate though, and take a look at the GAAP metrics. So free cash flow, yes, another adjusted non-GAAP metric, down 10% year over year. The GAAP operating income down 55% year over year. Yeah, pretty ugly. There's one of the bear cases. Obviously, AI is squeezing the profit margin of a company like ServiceNow because they are making so many investments in their new AI products. Also, there is amortization expense in here from the recent acquisitions that they've made as well. How about EBITDA on a GAAP basis? We're not going to use adjusted EBITDA on this, but GAAP EBITDA backing out especially that amortization expense. That metric actually is a little bit more interesting, up 9% year over year. Now, that still means because it's growing slower than revenue, which was up almost 25% year over year, it does mean there is still some EBITDA margin compression happening here. It doesn't fully exclude the elevated expenses involved with ramping up their new AI products and cybersecurity products, CRM products. But at the same time, it's not super hard to imagine what happens to these EBITDA margins and the other profitability margins if you wanna take a blend of all of them to get a full well-rounded picture of what's happening to the company. It's not hard to imagine those margins very quickly scaling back up because they are early on in the process of rolling those out to their customers, which means elevated sales expense, elevated R&D, elevated G&A. Across the board, all the expenses are up because these are new major product launches that are being accounted for in the current financials. The balance sheet is actually in pretty good shape, despite their acquisition streak, actually much better than we expected. 8.8 billion in cash and investments and 7.5 billion in total debt. Yeah, pretty good. We'll come back to this in just a moment. One reason why the balance sheet is still in pretty good health, some of those acquisitions, they issued new stock to make them. They didn't use up all their cash, just their cash to make those purchases. But we'll come back to that in just a moment because there is obviously a dilution effect that happens from that. But before we get there, what about the guidance? Yeah, guidance for the full year 2026, they actually increased a bit. You can see there at the bottom on subscription revenues, nearly 16 billion for the full year 2026. And that acquisition Armis is going to add about 125 basis points. But even excluding that, the 20% growth rate is better than previously guided, and that actually excludes currency exchange benefits. Yeah. Pretty good trajectory right here. Management thinks this is the inflection point that everybody is looking for. They delivered on the accelerating revenue growth, even if you back out of the three recent acquisitions, the bigger of the three, Armis, they are still reporting an initial bump up in revenue growth trajectory. So to round this discussion out, let's look at a reverse DCF to see one scenario that the investors could be baking into the current stock price. For this calculation, we're sticking with free cash flow per share, which ends up being $4.39. That metric actually took a hit last quarter as some of the acquisitions were paid in stock, as Nick mentioned earlier. But with this, we use a terminal growth rate of 5% over the next 10 years, and the growth rate ends up actually being quite low, about 6 to 7% CAGR over that time span. So not a super high bar for ServiceNow to clear. And if we actually lowered that terminal growth rate to 4%, that actually only increases the CAGR to 8% free cash flow per share growth. So ultra low bar for ServiceNow to clear. Yeah, this illustrates some of the diminishing returns at this point. The stock has been beaten up so badly that further falls in the stock price isn't going to make that much of a difference in the assumed free cash flow per share growth rate over the next 10 years. Yes, 10 years is a long period of time, but a lot of these software products tend to have a pretty long sales cycle, so that's why we stuck it at 10. But either way, as Kasey said, you can play around with that terminal growth rate, and there's not a massive dramatic effect on the implied fair value of the stock. So there's where we're sitting right now. The market's still very much basically pricing in ServiceNow as an AI loser and not yet wrapping its mind around what happens as AI proliferates into the greater economy, as it moves closer to the AI edge, be that healthcare devices, physical infrastructure like, utilities, government agency products like the military and drones. It could also just simply be more consumer devices powered by AI as well. ServiceNow thinks it's in position to benefit from that, especially with those new cybersecurity software products. That seems to be the hangup here. If you're gonna place a bet on ServiceNow, betting that the market is wrong and that it actually wins, perhaps to a much larger degree if AI moves out of the data center into the edge. For us here at CSI, this seems like a really good time to take another nibble on ServiceNow. It's already in our portfolio, and I feel like that's a pretty reasonable expectation that we have baked into the stock price now. And one more time, we'll remind you that you can find these tools that we've showed you in our video over at chipstockinvestor.com. Once again, we'll look at the investment thesis checklist. You can see that we've made some notes, reminding you of why you came to the conclusion you did and when you did, which is always important. Yeah, we've also saved this to the dashboard so we can look at ServiceNow in context of our other not just positions, but also watchlist positions. We've been looking at some other company stocks that have taken a hit as of late, the market has given up on. Again, a lot of them interesting to see are, what many people would call edge AI or future edge AI use cases, and ServiceNow definitely falls into that camp. So if you're looking for true portfolio diversification buying more stuff that just is all going up at the same time would not offer you true diversification. A company like ServiceNow that is non-correlated to these companies going up would actually offer you diversification. I know that seems silly, but if you're kind of a more passive longer term investor and you're not into trading and babysitting your companies, this is one that you probably might want to put on your list and flag for future research. Make sure you hit the subscribe button and check out this video that we did on Intuitive Surgical, another company that has taken quite the hit and is one of those edge AI robotics devices. Hopefully, I got enough keywords in there. Check that video out right here.