On Tuesday, Wells Fargo (NYSE:WFC) adjusted its price target on shares of ServiceNow (NYSE:NOW), increasing it to $900 from the previous target of $875. The firm has kept its Overweight rating on the stock. The adjustment follows Wells Fargo's analysis of ServiceNow's performance expectations for the first quarter, which suggests the company is likely to continue its trend of outperforming forecasts.
ServiceNow is projected to achieve robust growth in subscription revenue, with Wells Fargo modeling figures at the upper end of the company's guidance for the first quarter. The anticipated growth range is between 23.5% and 24.0% on a constant currency (cc) basis. Additionally, the firm expects calculated remaining performance obligations (cRPO) to grow by 20% at cc and operating margin (OM) to reach 29%.
The analyst from Wells Fargo highlighted ServiceNow's guidance for a 20% year-over-year growth in cRPO at constant currency, which represents a roughly 300 basis points deceleration quarter-over-quarter. However, the analyst views this deceleration as unlikely, considering the company's historical pattern of exceeding cRPO expectations by an average of around 200 basis points in FY23.
This outlook is maintained despite an anticipated 150 basis point headwind in the first quarter due to a shift to 12-month Federal deals, which is expected to increase to a 200 basis point impact in the second quarter.
ServiceNow's consistent performance in topping revenue expectations and its margin flow-through are cited as reasons for expecting the company to maintain its historical patterns of outperformance. Wells Fargo's price target revision reflects confidence in ServiceNow's ability to sustain its growth trajectory and continue delivering strong financial results.
InvestingPro Insights
ServiceNow's (NYSE:NOW) latest metrics underscore the company's strong financial health and growth potential. With a robust gross profit margin of 78.59% over the last twelve months as of Q1 2023, ServiceNow demonstrates its efficiency in generating profit from its revenues. This impressive margin aligns with the positive sentiment from Wells Fargo's recent price target adjustment.
The company's P/E ratio stands at 87.15, which might appear elevated, but considering the PEG ratio of 0.2, it indicates that ServiceNow's price is reasonable relative to its near-term earnings growth. This suggests that the stock may be an attractive option for investors looking for growth at a reasonable price. Additionally, ServiceNow has achieved a significant 69.67% one-year price total return, reflecting its strong market performance and investor confidence.
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