We're Adjusting Our ServiceNow Price Target After 'Meaningful' AI Gains
Those on Wall Street who called for a dramatic slowdown in revenue amid DOGE cuts got it wrong.
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Shares of TheStreet Pro Portfolio holding ServiceNow NOW are moving higher Thursday morning following several Wall Street firms raising their price targets on Wednesday night’s quarterly results, which included a 20% year-over-year jump in subscription revenue. Helping fuel that growth in subscription revenue were meaningful gains on the AI front, which also led the company to lift its full-year subscription revenue guidance to $12.64 billion-$12.68 billion, up 18.5%-19% year over year.
Short-covering is also likely providing added lift to the shares. We say this because as of March 31, per data from Nasdaq, traders were short 4.22 million shares of NOW stock. Based on average trading volumes, that could take just over two days to cover, but we could very well see the majority of that action happen Thursday.
The March Quarter
For the March quarter, ServiceNow reported an 18.5% year-over-year increase in revenue to $3.09 billion, which was in line with the consensus estimate. Growing slightly faster was the company’s subscription revenue, which clocked in at $3.0 billion and comprised just over 97% of the overall revenue stream. EPS came in at $4.09, which was well above the estimate of $3.83 and the $3.45 posted in the year-ago quarter.
Leading up to ServiceNow’s earnings report, we’ve shared multiple data points about continued, if not accelerating AI adoption as companies and other institutions sought to drive a combination of productivity and savings.
During the company’s earnings call, comments from CEO Bill McDermott confirmed our thinking was on the right path:
"I met with the CEO of a U.S. auto manufacturer, who is laser-focused on increasing competitiveness in the face of tariffs. If they don't adapt their global supplier network fast enough, their costs will increase by up to $10,000 a vehicle. Unlike past disruptions in the global markets, supply chain AI agents now reconfigure business rules in real time.
"With regard to the public sector, let me be clear, we had a great Q1 because ServiceNow strategy is rooted in government automation and modernization… In Q1, U.S. public sector grew by over 30% year-on-year with six new logos, including one in U.S. federal. We had 11 federal deals over $1 million up from eight a year ago, including two that were over $5 million."
Later during the earnings call, ServiceNow said that one government agency is now using the company's AI agents to automate contract reviews, streamline approvals, and lower operational costs. Matching those figures up against the company’s double-digit increases in backlog figures and revenue growth expectations explains why those who called for a dramatic slowdown in revenue got it wrong. It was those same assumptions that led to some of the sharp price cuts for NOW shares, but as we indicated above, we are seeing many of those cuts being lifted Thursday.
Margins also ticked higher year over year due to a combination of favorable pricing and mix, which we chalk up in part to AI adoption, but also to prudent marketing spending by management. We see that continuing in the coming quarters, driving additional margin leverage and EPS growth.
During the quarter, ServiceNow also announced plans to acquire Moveworks, which offers front-end AI assistant and enterprise search technology, and Logik.ai, which provides AI-powered, and composable configure, price, quote solutions for sales teams. We see these moves augmenting its offering and helping pave the way for further adoption of AI and subscription-based revenue.
During the quarter, ServiceNow scooped up 316,000 shares of its stock, leaving ~$3 billion under its current share repurchase program. Even after that effort, the company’s balance sheet had $10.9 billion in cash and investments entering the June quarter.
Guidance
For the June quarter, ServiceNow sees subscription revenue coming in at $3.03 billion-$3.04 billion, which implies overall revenue near $3.1 billion, in line with consensus forecasts. The lift in that outlook is backed by the company’s current remaining performance obligations (cPRO) of $10.3 billion and remaining performance obligations (RPO) of $22.3 billion exiting the March quarter. Those same figures, which were up 19% and 23%, respectively, on a year-over-year basis, also back the higher subscription revenue outlook of $12.64 billion‑$12.68 billion for this year.
We’ll look for more insight on the afternoon of May 5 when the company hosts its 2025 Financial Analyst Day. That includes an updated look at margin expectations for the second half of 2025 and what that could mean for EPS in the last two quarters of the year and for 2026. We’ll also be interested in the company’s M&A pipeline as well as integration efforts for recent nip and tuck deals, including the two completed in the March quarter.
Our Takeaways
In our pre-earnings comments on Wednesday, we acknowledged we had been waiting for last night’s earnings reports and the learnings it would bring before adjusting our NOW price target. We are certainly glad we did. Nevertheless, a more conservative outlook for valuation multiples is leading us to trim our price target back to $1,100 from $1,250, ahead of the company’s upcoming set of business and financial presentations. The 17% upside potential to our new target is sufficient to keep our One rating intact, but we’ll adjust the rating as needed based on further moves in the share price and what we learn in just under two weeks.
Given the short interest covering mentioned above, we suggest folks who are inclined to heed our One rating and scoop up NOW shares let the short-covering subside as the shares could give back some of the quick gains Friday or early next week.
At the time of publication, TheStreet Pro Portfolio was long NOW.
