Faster Growth vs Lower Price: ServiceNow's Valuation Puzzle

Salesforce and ServiceNow are two AI software giants that reported strong agentic bookings this summer, but they differ significantly in their valuations. ServiceNow's revenue grew by 24% and it trades at 27x forward earnings, while Salesforce's revenue grew by 10.8% and it trades at 14x. This disparity makes investors choose between speed and value.

ServiceNow's subscription revenue reached $3.877 billion, up 24.5%, with its AI annual contract value (ACV) passing $1 billion. The company's AI Control Tower managed AI agents across other vendors' platforms, positioning ServiceNow as the leader in governing every agent. Meanwhile, Salesforce's current remaining performance obligations rose by 14%, and its Agentforce annual recurring revenue exceeded $1.5 billion.

ServiceNow is expanding into security with acquisitions like Armis and Veza, while Salesforce leans on upselling and buybacks to boost sales. The company has a $25 billion accelerated buyback plan that cut diluted shares to 821 million from 962 million. Despite ServiceNow's faster growth, its steeper fall has narrowed its premium to about twice as much per dollar of forward earnings.

ServiceNow guided Q3 subscription growth to about 20.5%, partly due to a U.S. federal revenue pull-forward in Q2 instead of Q3. Salesforce's management expects organic growth to pick up in the second half, with Dreamforce landing as a small success despite the stock's fall.

The author leans towards Salesforce at this valuation, citing its 7.34% free cash flow yield, growing backlog, and shrinking share count as reasons to make money. Growth investors comfortable paying up may prefer ServiceNow, but the author would change their view if Salesforce's organic growth stalls in Q3 or if ServiceNow shows no gap from the federal shift.