We're Raising This Price Target on AI-Related Benefits

* We are boosting our price target for ServiceNow by $60.

* NOW shares are popping on its June-quarter results, but also short-covering.

* We reiterate our Two rating given share-price gains, but will revisit once short-covering ceases.

After wrapping up today's Office Hours in the Portfolio Forum, we are raising our price target on ServiceNow NOW shares to $900 from $840 and reiterating our Two rating. The upward revision in our target stems from a few factors, all of which confirm our rationale for adding NOW shares to the portfolio when we did.

As far as our Two rating goes, as you’ve probably noticed NOW shares are popping considerably today, which can be explained in part by the company’s quarterly results but also by short-covering. Per data from the NYSE, short interest for NOW stood at roughly 3.3 million shares heading into its earnings report. Based on the average trading volume for the stock, it’s a good bet we are seeing some covering and that could continue to keep NOW elevated for the next few days. Once that wave of activity passes, let’s see where the shares settle out and the upside to our new price target.

For its June quarter, ServiceNow reported EPS of $3.13, well ahead of the $2.83 consensus as revenue for the quarter climbed more than 22%, year over year, to $2.63 billion, besting the $2.61 billion consensus. Subscription revenue came in at $2.54 billion, up 23% year over year and management guided 2024 subscription revenue to $10.575 billion-$10.585 billion. That includes subscription revenue between $2.660 billion-$2.665 billion, up some 20% year over year.

Helping support that forecast, the company’s current remaining performance obligations — something we would call backlog — stood at $8.78 billion exiting the quarter, up 22% year over year and up from $8.45 billion at the end of March. ServiceNow’s longer-term backlog, which it refers to as remaining performance obligations, rose to $18.6 billion at the end of the June quarter, up 31% year over year and compared to $17.7 billion exiting the March quarter. Those figures underscore the view that ServiceNow is, as Nvidia NVDA CEO Jensen Wang called it, the AI operating system for the enterprise.

Touching on ServiceNow’s operating margin, management lifted its outlook to 29%-29.5% for this year, which implies further improvement from 27% in the June quarter and 28.5% in H1 2024. Those figures, as well as the 200-basis point operating margin expansion compared to Q2 2023, point to ServiceNow continuing to realize the benefit of favorable pricing as customers onboard its AI solutions.

For those critics of AI use cases and adoption, we would suggest giving the ServiceNow earnings conference call a listen.

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At the time of publication, TheStreet Pro Portfolio was long NOW and NVDA.