Analyst unveils eye-popping stock price target for AI software giant

Wall Street has sky high expectations for this tech stock's AI solutions.

Jan 26, 2024 - 08:30

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Analyst unveils eye-popping stock price target for AI software giant

You'd better step back, or you might get trampled.

We're not talking about a cattle drive here, but a veritable stampede of stocks analysts who came running after ServiceNow posted its fourth-quarter results on Jan. 24.

Bill McDermott, chief executive of ServiceNow. Photographer: Victor J. Blue/Bloomberg via Getty Images
Bloomberg/Getty Images

The company delivered fourth-quarter adjusted earnings of $3.11 per share, beating Wall Street’s forecast of $2.77 per share. Revenue totaled $2.44 billion, topping analysts’ call for $2.4 billion. Revenue and sales grew 26% and 36% from one year ago.

But the excitement goes beyond numbers as the Santa Clara, Calif.-based company stakes its claim in the new frontier of artificial intelligence, which, according to some estimates, will contribute more than $15 trillion to the global economy by 2030.

Bill McDermott, ServiceNow's chairman and CEO, was pretty excited about the results, and he shared his feelings with analysts during the company's earnings call.

"Our perimeter is growing," he said. "Our platform adoption is growing. We are, in fact, in a new era of business transformation powered by AI. This is unlocking massive opportunities in the enterprise software industry."

"And ServiceNow is extremely well positioned, not only to lead this movement but to define it," he said, according to a transcript of the call. "To say we're fired up would be an understatement."

Analysts boost their price targets

McDermott noted that research firm Gartner estimates tech spending will total $5 trillion, growing to $6.5 trillion by 2027, so that “for the first time in a decade, IT services will become bigger than communication services in 2024.”

Gartner forecasts that by 2027, nearly all of the growth in worldwide IT spending will come from software and IT services.

"And when you drill deeper into the Gartner forecast between 2023 and 2027, $3 trillion will be spent on AI," McDermott said. "What we have here is a strong, durable market being supercharged by a once-in-a-generation secular trend."

During the call, McDermott cited such big-time brands as Chipotle (CMG) - Get Free Report, Air France, TIAA (TILIX) - Get Free Report, NTT Data Group Corp. (NTDTY) - Get Free Report, and Bosch that are all "digitally transforming with ServiceNow."

And he announced a five-year strategic alliance with credit card giant Visa (V) - Get Free Report to transform payment service experiences.

In addition, McDermott said that starting this month, ServiceNow will be available as a SaaS offering--or Software as a service -- in Amazon's (AMZN) - Get Free Report AWS marketplace.

AWS markets compute power, storage, database, and other services for startups, enterprises, government agencies, and academic institutions. Many use Amazon Web Services to train and run their AI projects. AWS is the largest cloud services provider, with a 50% market share among the top 10 competitors, according to HG Insights.

Wall Street responded with some heavy-duty enthusiasm. A laundry list of analysts boosted their price targets for ServiceNow shares.

CEO: 'We're building a masterpiece'

Stifel, for example, raised the firm's price target on ServiceNow to $820 from $740 while keeping its buy rating on the shares.

The firm pointed to the company's strong quarterly results and how management highlighted that Al-products is off to a strong start in the first full quarter since launch.

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The firm said it expects that ServiceNow's expanding platform, growing pipeline, large deal momentum, and emerging generative Al opportunity should enable the company to maintain 20%-plus revenue growth and margin expansion.

Bank of America lifted its price target from $800 to $900, and analyst Brad Sills told investors in a research note that he continued to view "ServiceNow as a key beneficiary of three key secular trends, AI, consolidation and cloud."

"Closing the gap on the remaining large enterprises not running ServiceNow was a key go to market focus in 2023 and the effort has yielded real results," wrote Sills, who reiterated his buy rating. "These new enterprise customers come to ServiceNow with large IT budgets, which bodes well for future expansion deals."

BMO Capital really swung for the fences when the firm raised its price target more than $200, turning up the heat from $630 to $850 a share.

The firm, which kept its outperform rating, said ServiceNow delivered solid results with 23% constant currency CRPO growth, compared to previous guidance of 21%, the firms said in a research note.

CRPO, or "current remaining performance obligations," refers to the service obligations over the next 12 months from the reporting period.

The March quarter CRPO guide may be viewed as modestly disappointing, BMO Capital said, but the full-year 2024 revenue guide is encouraging, and, more broadly, ServiceNow's initial Al traction provides confidence in the company's sustainable technology leadership and growth potential.

"We're building a masterpiece here, and we're only getting started," McDermott told analysts. "2024 will show that we're putting AI to work for the world because now, as ever, the world works with ServiceNow."

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