On Tuesday, BofA Securities indicated a positive outlook for ServiceNow (NYSE:NOW) shares by raising the price target from $1,075.00 to $1,280.00, while reiterating a Buy rating.
The adjustment follows a series of discussions with key ServiceNow partners, revealing a strong performance in deal activities for the fourth quarter, which either met or exceeded expectations, marking a slight improvement from the third quarter.
The report highlighted several key trends contributing to ServiceNow's momentum. These include robust activity in the core IT Service Management (ITSM) and IT Operations Management (ITOM) categories, with IT Asset Management (ITAM) gaining traction among existing customers. Additionally, there has been an uptick in Customer Service Management (CSM) and HR Workflow as the company shifts focus from internal to external stakeholders.
ServiceNow's product Now Assist is also gaining ground, moving beyond proof of concept deals to a more tangible pipeline. The company has seen particular strength in the financial services, healthcare, telecom, and federal sectors, which balances out some of the weaknesses observed in the retail vertical. With less than 20% market share in the combined ITSM, ITOM, ITAM, and CSM markets—valued at over $70 billion—ServiceNow is poised for continued share gains and revenue growth, with current growth rates in the low to mid-20s.
ServiceNow, which is second only to Microsoft (NASDAQ:MSFT) in generating tangible AI revenue, is expected to see significant growth from the Now Assist product. This is backed by channel feedback on the compelling return on investment from case deflection in the core ITSM offering. This optimistic view is supported by the $90+ million Annual Recurring Revenue (ARR) base for Now Assist, as mentioned during the third-quarter earnings call.
The new price objective of $1,280 is based on 51 times the estimated calendar year 2026 free cash flow, up from the previous multiple of 43. It also reflects 1.9 times the forecasted 26% three-year compound annual growth rate (CAGR) through fiscal year 2026, which is a premium compared to the Growth at a Reasonable Price (GARP) group average of 1.4 times an 18% growth rate. This premium is justified by the durability of ServiceNow's growth prospects.
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