New Target Price for ServiceNow Alongside Growing AI Uptake
The 18% increase in deferred revenue keeps us bullish on the software firm as AI adoption continues.
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Following Thursday morning’s post-earnings retreat in ServiceNow NOW shares, we are lifting our rating to One from Two as we increase our price target to $1,250 from $1,200.
Others across Wall Street are also lifting their targets, including Jefferies, Canaccord, Bernstein and others. In our view, the retreat in the shares is the latest in a growing number of overreactions in share prices relative to the size of either the earnings or guidance shortfall.
What that reaction is overlooking is top-line growth still clocking in around 20% even after the impact of currency is included. As we have in the past, we’ll let cooler heads prevail and focus on the prospects ahead, which include further margin leverage compared to 2024 on top of that expected 20% top-line growth. That signals greater AI uptake across ServiceNow’s offering by its expanding customer base. While the management team rattled over some impressive metrics for customer wins on the earnings call, we are far more impressed with the 18% year-over-year increase in total deferred revenue coming into 2025 and the visibility that brings.
And it is possible management is using its earnings call comment that it anticipates “more back-end weighted deal linearity in 2025 for federal, reflecting the outcome of the U.S. election” to reset the earnings bar favorably.
Exiting 2024, ServiceNow had $10 billion in cash, which includes the 293,000 shares it repurchased during the quarter. Including the $3 billion increase to that program, the company had $3.3 billion remaining under its current authorization. With the Q4 2024 repurchase efforts happening between $927 and $1,107, we would not be surprised to learn the company put that recharged program to work when it reports the current quarter. Those repurchase price points also make us feel quite good about our early January acquisitions of more NOW shares near $1,050 and $1,028.
Given the size of the Portfolio’s existing position in NOW shares, we’re going to wait until the shares settle out from the current market reaction before making any additional moves. Had we a smaller position in the shares, we would likely be taking some advantage of this drop in the shares.
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At the time of publication, TheStreet Pro Portfolio was long NOW.
