We're Initiating a New Tech Position
AI program wins and pricing could make consensus expectations conservative for this cloud-based intelligent workflow platform company.
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* We are starting a position in ServiceNow with a $840 price target.
* AI adoption should accelerate program wins and drive favorable pricing lift, factors that could make current consensus expectations conservative.
* The net upside to our price target leads us to begin with a Two rating.
| Symbol | Transaction Type | # Shares Traded | Recent Price $ | Shares Owned After Trade | % Portfolio |
|---|---|---|---|---|---|
NOW | Buy | 66 | 656.50 | 66 | 1 |
After you receive this Alert, the TheStreet Pro Portfolio will buy 66 shares of ServiceNow NOW at or near $656.50. This initial position in NOW will represent roughly 1% of the portfolio’s assets.
This cloud-based intelligent workflow platform company is poised to benefit as existing enterprise customers adopt AI-enabled solutions, driving pricing gains and new program wins. The recent 15% drop in NOW shares is allowing us to start this position at price levels not seen since late November even though the company’s remaining performance obligations have grown considerably since the September quarter.
Subscription revenue accounts for 97% of the company’s revenue stream and with 98% retention across a customer base that includes 85% of the Fortune 500 we would argue it is well entrenched. That also bodes well for upselling AI-enabled solutions across its platform, something that should drive program wins and improve pricing.
Current price targets for NOW range in between $780-$950 with the consensus around $850, almost 30% higher than current levels. We can see why those targets are where they are given expected top and bottom-line growth over the next few years to $13.1 billion and $16.25 per share in 2025 from $8.97 billion and $10.78 per share in 2023, respectively. Examining enterprise value-to-sales and PEG ratios leads us to see NOW shares as worth $840 with a potential downside of $585-$600, which offers a net upside of 16%-18% from the current share price.
That favorable trade-off is leading us to start a new position in NOW shares with a Two rating and a panic point of $585.
As NOW shares move higher, we will lift our panic point accordingly. Factors that could lead us to revise our target to higher levels will be accelerating program wins, which will be reflected in ServiceNow’s current remaining performance obligations and remaining performance obligations, and greater AI-related pricing uplift.
In terms of risk, enterprise spending and deal conversion cycles will be on our radar screen. We would revisit our Two rating if NOW shares would slip near $645 because the net upside to our price target would be above 20%. That would also be a level at which we could see adding more shares to the portfolio.
(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to toggle the chart to sort by Purchase Date.)
At the time of publication, TheStreet Pro Portfolio had no positions in any securities mentioned.
