ServiceNow Stock Is Expensive. It Gets a New Buy Rating. -- Barrons.com

Karishma Vanjani

Investors are paying dearly to own ServiceNow shares, suggesting they might be getting overly optimistic about the software company's prospects. Raymond James analysts say buy the stock.

In a note on Tuesday, Adam Tindle and the team initiated coverage on ServiceNow at Outperform and assigned a $1,200 target for the stock price, implying a 10% gain from its last close.

The California-based cloud-based company provides tools to automate multiple workflows at big businesses. It also integrates generative artificial intelligence, allowing for intelligent chatbots. Wall Street estimates a 22.5% year-over-year growth in revenue this year, a slight downshift from 23.8% and 23% in the prior two years.

High growth and the promise of AI have meant investors are valuing the company at 21.7 times its future sales, a historically high enterprise-value-to-sales multiple considering its five-year average of 18.7 times. Its multiple is more than two times that of Salesforce.

Expensive stocks reflect investor confidence in the company's growth, but it also means shares are more vulnerable to risks -- like missing earnings estimates -- that can lead to sharp declines.

Tindle agrees. The near-term valuation is challenging, he writes.

However, based on the company's rare blend of high revenue growth and free cash flow of above $3.4 billion in 2024, "We believe ServiceNow deserves an elite valuation," the analyst wrote. The potential for margin improvement from making money off AI also adds to the power of the stock.

Not everyone is bullish on ServiceNow. KeyBanc downgraded the stock this month from Overweight to Sector Weight, warning that potential budget cuts under the Trump administration could create uncertainty, especially since federal sales are a "major source of strength."

The analysts also pointed out ServiceNow's expensive valuation.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

December 24, 2024 10:18 ET (15:18 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.