ServiceNow (NOW) has sustained a massive rally over the past year, rising 67% to $950.85 per share. Despite the prolonged upswing, I believe the stock’s next stop is the $1000 mark, driven by positive revenue and free cash flow momentum, as evidenced by the company’s recent Q3 results. Interestingly, the enterprise software giant’s valuation remains reasonable relative to its growth outlook, which shows no signs of a slowdown. For these reasons, I am bullish on ServiceNow stock.
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Q3 Results Reflected Excellent Revenue Growth Momentum
ServiceNow has managed to sustain excellent revenue growth momentum in recent quarters, and Q3 was no different. For the quarter, subscription revenues increased to $2.715 billion, up 23% year-over-year or a 22.5% increase in constant currency. This growth was primarily fueled by the ever-expanding adoption of the Now Platform and its role as an AI leader for enterprise transformation. CEO Bill McDermott stressed that ServiceNow’s integration of generative AI into its platform has been a game-changer, driving further interest from both existing and new clients.
More specifically, The Now Platform’s latest “Xanadu” release introduced hundreds of new AI capabilities in the quarter, further bolstering ServiceNow as an industry leader in AI-fueled enterprise solutions. Given that a growing number of companies are looking to unlock efficiencies through large language models (LLMs) these days, it’s clear that ServiceNow’s established role in the space and its quick rollout of this LLM tech continue to drive excellent growth. Innovations like “Now Assist Skill Kit” that help clients streamline workflows and boost productivity seem to be in particularly high demand.
ServiceNow’s Profitability Is on the Rise
In addition to excellent revenue growth, another factor fueling the bullish sentiment around ServiceNow stock is its improving profitability, demonstrated by expanding margins and strong free cash flow growth. The company’s adjusted operating margin reached 31% in Q3, surpassing guidance by 150 basis points. Shedding some light, CFO Gina Mastantuono noted that ServiceNow’s outstanding revenue growth has paved the way for continued margin expansion, highlighting how economies of scale have driven these profitability gains.
To elaborate on that front, ServiceNow’s scaling efficiencies were especially evident in its subscription-based revenue, which played a critical role in these margin gains. With a notable chunk of ServiceNow’s customer base in the Fortune 500 and a corporate-wide push toward automated and generative AI-enabled workflows, ServiceNow has been able to keep the rate of cost growth below revenue growth. Evidently, its adjusted free cash flow margin for Q3 jumped to 17%, up from 9% last year, which drove a 140% increase in adjusted free cash flow to $471 million.
Room for More Upside in Valuation
Although ServiceNow shares have surged recently, I believe there’s still room for upside in its valuation. Now trading at 17.8 times consensus sales and 68.4 times consensus EPS for the year, the stock might seem pricey at first glance. However, with Wall Street projecting 20% growth in both sales and EPS over the coming years, these multiples start to make sense. ServiceNow’s remaining performance obligations (RPO) further back this outlook, as this metric is a credible indicator of future revenue. ServiceNow’s current RPO, in fact, reached $9.36 billion in Q3 and increased 26% year-over-year, which reinforces the company’s encouraging trajectory.
Consequently, I think it’s no surprise that the market has assigned a premium price tag to the stock. The company has solidified its role as an essential partner in digital transformation, especially with its AI-driven automation and compliance enhancements across industries. This creates a revenue stream that’s not only resilient but also hard to replace, justifying investors’ willingness to pay top dollar for the stock. A major valuation expansion is unlikely to take place from the stock’s current levels, but a further rise to $1,000 per share in the near term feels well within reach.
Is NOW Stock a Buy, According to Analysts?
Looking at Wall Street’s view on ServiceNow stock, we can see a Strong Buy consensus rating based on 26 Buys, two Holds, and one Sell rating assigned in the past three months. At $995.00, the average NOW stock price target suggests a 4.64% upside potential.
If you’re unsure which analyst to trust for trading NOW stock, consider Rob Owens from Piper Sandler. According to Tipranks’ ratings, he is a five-star analyst. He has been the most profitable analyst covering this stock over the past year, delivering an average return of 40.22% per rating with a 97% success rate.
Conclusion
ServiceNow’s excellent top and bottom line momentum indicates further upside potential. Driven by the rising adoption of its AI-driven Now Platform, the company’s revenue gains have been complemented by expanding margins and strong free cash flow growth.
Sure, the stock’s valuation might seem high, but ServiceNow’s critical role in digital transformation and sticky revenue streams justify investor confidence, in my view. Considering the strong bullish momentum behind the stock, I believe ServiceNow is well on track to reach $1,000 per share in the near future.
