Analyst highlights ServiceNow's strong execution and growth potential as price target is raised

On Thursday, Goldman Sachs reaffirmed its optimistic stance on ServiceNow (NYSE:NOW), maintaining a Buy rating with an increased price target of $1,000, up from the previous $940. The firm's confidence in ServiceNow is rooted in its status as a top-tier software company, with expectations for the company to slightly surpass projected growth figures in its upcoming third-quarter 2024 financial report, set to be released on October 23.

ServiceNow's subscription revenue growth is anticipated to be at least 20.3% to 20.5% in USD and constant currency (CC) terms, which is marginally higher than the consensus estimate of 20.1% in USD. Moreover, the calculated Remaining Performance Obligations (cRPO) growth is expected to reach about 22.5% to 22% in USD/CC, compared to the consensus of 22.3% in USD. ServiceNow's stock has seen an increase of 28% since the second-quarter earnings report, a reflection of investor enthusiasm driven by strong performance in the first half of the year, including successive quarters of exceeding expectations in subscription revenue and cRPO.

The analyst highlighted several factors that reinforce Goldman Sachs' perspective, including a stable macroeconomic environment compared to the first half of the year, positive pipeline messaging, especially regarding the public sector from the second-quarter results, and a significant increase in sales capacity with a notable rise in sales and marketing headcount.

Additionally, ServiceNow's potential to capture a substantial share of the $1 trillion-plus General Artificial Intelligence (Gen-AI) market opportunity was emphasized, given its extensive portfolio of workflows and the prospect of a multi-year Gen-AI product cycle.

The valuation of ServiceNow has reached a multi-year peak at 51 times the next twelve months' enterprise value to free cash flow (NTM EV/FCF). Despite this high valuation, the firm anticipates ongoing discussions about the level of outperformance and guidance improvements needed to further drive the stock price.

This is particularly relevant considering the company's largest Public Sector quarter, escalating expectations for Gen-AI, and the focus on growth prospects for the calendar year 2025, for which Goldman Sachs estimates a 21.8% growth rate compared to the consensus of 20.5%.

ServiceNow's consistent performance, with a likely continuation of the moderate beat-and-raise pattern in subscription revenue and cRPO, is expected to bolster investor confidence in the company's ability to sustain 20% or higher growth into calendar year 2025.

In other recent news, ServiceNow has been the subject of considerable attention. Evercore ISI has raised its price target for ServiceNow to $950, maintaining an Outperform rating. This decision is backed by positive feedback from a survey of ServiceNow partners, indicating a stronger pipeline and positive revenue growth expectations.

ServiceNow also reported over $1 billion in customer service management revenues and maintains a dominant position in the financial services sector. Despite potential disruptions due to an ongoing Department of Justice investigation into Carahsoft Technology Corp., a key partner for ServiceNow, the company remains ambitious, aiming to become the most valuable enterprise software company by 2030.

Bernstein maintained an Outperform rating on ServiceNow, acknowledging short-term risks but expressing confidence in the company's potential for long-term growth. Future growth is projected to be driven by increasing enterprise investment in AI, a market expected to reach $3 trillion by 2027.

The company is also collaborating with NVIDIA (NASDAQ:NVDA) and Hugging Face to develop domain-specific large language models. These are recent developments in the company's trajectory.

InvestingPro Insights

ServiceNow's strong market position and growth prospects, as highlighted by Goldman Sachs, are further supported by real-time data from InvestingPro. The company's impressive gross profit margin of 79.07% for the last twelve months as of Q2 2024 underscores its operational efficiency and aligns with its status as a top-tier software company. This metric, coupled with a robust revenue growth of 24.17% over the same period, reinforces Goldman Sachs' optimistic outlook on ServiceNow's performance.

InvestingPro Tips also indicate that ServiceNow is a prominent player in the Software industry, which corroborates Goldman Sachs' assessment of its potential to capture a significant share of the Gen-AI market opportunity. Additionally, the company's strong return over the last three months, with a price total return of 26.31%, reflects the investor enthusiasm mentioned in the article following ServiceNow's recent earnings reports.

It's worth noting that ServiceNow is trading near its 52-week high, with its current price at 99.28% of the 52-week high. This aligns with the article's mention of the stock's 28% increase since the second-quarter earnings report. However, investors should be aware that the company is trading at high valuation multiples, including a P/E ratio of 167.94, which echoes Goldman Sachs' observation about the company's peak valuation.

For readers interested in a more comprehensive analysis, InvestingPro offers 16 additional tips for ServiceNow, providing a deeper understanding of the company's financial health and market position.

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