u/Don236518

ServiceNow is down more than 50% in the SaaS selloff, so instead of building a forecast and arguing for a price target, I ran a reverse DCF. I took today’s $107 share price and solved for the FCFF growth rate the market is actually implying.

I started with FY2025 free cash flow and adjusted it for stock-based compensation, since I treat SBC as a real cost rather than a non-cash add-back. From there I used a 9.5% WACC, a 4.35% terminal growth rate (set to the risk-free rate), and a 10-year explicit forecast, then solved for the growth rate that makes the model’s output equal the current price. The answer came out to 11.2% annual FCFF growth for the next decade.

ServiceNow has grown SBC adj. FCFF at 26.8% over the last five years, 40.6% over ten, and 37.7% over three. So on every historical time frame, the company has compounded 2-3x faster than what the market is now pricing in.

(I tried importing a sensitivity table here with implied share price based on WACC and implied FCFF growth rate but for some reason I can’t, or don’t know how to.)

Anyway, my two cents: I think the pessimism baked into the price is exaggerated, and while there’s a real threat from AI, I think it’s too early to call. When the market assumes a company will slow its FCFF growth to less than half its historical levels, much of the downside may already be priced in, and that’s kind of the setup I’m happy to own a little of and wait on.

Genuinely curious what everyone thinks, is 11.2% FCFF growth rate too pessimistic or actually fair for the next 10y or so?

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Do you think ServiceNow can grow its FCFF faster than 11% a year for the next decade?