ServiceNow Stock: Expensive or Undervalued? Raymond James Weighs In

ServiceNow (NOW) stock has been a darling of the tech sector, with its innovative AI-driven platform and impressive growth. However, its high valuation has raised eyebrows among investors, with some questioning whether the stock is overpriced. Recently, Raymond James initiated coverage of ServiceNow with an 'Outperform' rating and a $1,200 price target, adding fuel to the debate. Let's delve into the factors driving ServiceNow's valuation and explore whether the new buy rating is justified.

ServiceNow's growth in subscription revenues and customer base has been a significant driver of its high valuation. In Q3 2024, subscription revenues grew 23% year-over-year, reaching $2,715 million, while total revenues increased 22% to $2,797 million. The company's customer base also expanded, with 2,020 total customers having more than $1 million in annual contract value, representing a 14% year-over-year growth. These strong financial results have contributed to ServiceNow's elevated valuation, with a P/E ratio of 172.04 and a forward P/E of 70.64.



AI innovations and strategic partnerships have played a crucial role in maintaining ServiceNow's competitive advantage and high valuation. The company's recent Q3 2024 results showed 23% YoY growth in subscription revenues, with AI being a key driver. The Xanadu release introduced hundreds of new AI capabilities, including Now Assist Skill Kit and purpose-built GenAI industry solutions. Additionally, ServiceNow's integration of Agentic AI into its platform will unlock 24/7 productivity at massive scale. Strategic partnerships, such as the one with Amazon Web Services, further enhance ServiceNow's competitive advantage by accelerating AI-driven business transformation.



ServiceNow's financial performance and earnings growth have justified its current valuation, and analysts expect this trend to continue in the long term. In the last 12 months, ServiceNow had revenue of $10.46 billion and earned $1.34 billion in profits, with earnings per share of $6.43. Its operating margin of 12.04% and profit margin of 12.77% indicate a healthy and efficient business model. Moreover, ServiceNow's free cash flow of $3.38 billion and FCF margin of 32.27% demonstrate its ability to generate cash from operations. With a 5-year EPS growth forecast of 26.80% and a 5-year revenue growth forecast of 19.88%, ServiceNow's earnings growth is expected to remain robust, supporting its current valuation.

The new buy rating from Raymond James, with a $1,200 price target, signals a positive shift in sentiment for ServiceNow stock. This rating, along with the firm's Outperform stance, suggests that analysts believe the stock's recent valuation challenges can be overcome by its strong growth potential. The consensus rating remains "Buy," with an average price target of $1,030.86, indicating that the majority of analysts share this bullish outlook. The new rating may further boost investor confidence, potentially driving momentum and pushing the stock price closer to the $1,200 target.

In conclusion, ServiceNow's high valuation is driven by its impressive growth in subscription revenues and customer base, as well as its AI innovations and strategic partnerships. Despite the high valuation, ServiceNow's strong fundamentals and growth prospects make it an attractive investment opportunity. The new buy rating from Raymond James further supports this bullish outlook, suggesting that the stock's recent valuation challenges can be overcome by its robust growth potential. As always, investors should conduct thorough research and consider their risk tolerance before making investment decisions.