- Evercore ISI analysts hike target by $50 to $650
- Consensus predicts company could nearly double in three years
- Stock has surged 3,009% since 2012 IPO
Analysts see AI (artificial intelligence) as a major lever of future growth for ServiceNow (NOW:NYSE), the $114 billion digital productivity and workflow management platform.
Over the past couple of decades software delivery has changed hugely, shifting from multi-year licences to a subscriptions-based model commonly called software-as-a-service, or SaaS in the industry vernacular.
SaaS solutions enable software companies to generate stable recurring revenues from their clients instead of relying on periodic upgrades. It’s also great for users, who only pay for what they use and can very easily scale up (or down) across multiple devices as their own business prospects ebb and flow.
AMONG THE SAAS LEADERS
ServiceNow has been among the SaaS frontrunners, a fact reflected in its impressive growth and a knockout share price performance. Between full year to 2019 and 2022 (to 31 Dec), revenues more than doubled to $7.25 billion, driving a 745% surge in operating profit, to $355 million last year.
Since its IPO (initial public offering) in 2012 at $18, the stock has soared to $559.60. That’s +3,009%!
Evercore ISI analysts believe Generative AI could provide the lever for the company to roughly double again over the next three years and have just upped their target price for the stock by $50 to $650 on ServiceNow’s ability to monetise this emerging technology.
ServiceNow is preparing to introduce its Vancouver release in late September, which will encompass several of its initial Generation AI services. While it’s still in the nascent stages, the analysts offered their thoughts on the potential for monetisation tied to these offerings and the introduction of the new Pro+ SKU (stock keeping unit) product pricing range.
PRICING GENERATIVE AI LINES
‘We see the Pro+ SKU being a potential 7% to 10% uplift to full year 2025 net new annual contract value and 1% to 3% uplift to the current rough $15 billion 2026 subscription revenue target,’ Evercore analysts said. ‘This is predicated on around 5% penetration per year, with a circa 20% realized pricing uplift versus the rough 60% list price uplift that management has discussed,’ they said in a client note.
‘Our penetration and realized pricing assumptions are purposefully conservative relative to what ServiceNow saw in terms of the Pro adoption given that we believe AI introduces some new variables in terms of data preparation and potentially fewer seats in some scenarios.’
ServiceNow evaluates penetration rates of Pro SKU as a percentage of total customers, whereas Evercore’s forecast is based on a percentage of total annual contract value, a more conservative way of drawing conclusions. This additional layer of caution suggests that larger customers, who are likely early adopters, might exhibit higher penetration rates in terms of total annual contact value than what is indicated by percentages of total customers, hinting at the potential for upside to Evercore’s assumptions.
All-in-all, the new price target is based on the expectations that ‘ServiceNow’s AI services coupled with an improving macro backdrop could have a positive impact’ on the 2024 estimates. Analyst consensus for 2024 currently forecasts earnings per share of $12.23 on $10.85 billion revenues, according to Koyfin data.
