Digital workflow company ServiceNow Inc. (NOW - Get Rating) recently reported a solid fourth-quarter earnings report, beating consensus estimates on the top and bottom line for the fourth consecutive quarter. However, the stock is currently trading 20% below its 52-week high of $707.60, which it hit on November 4, 2021.

In January, Piper Sandler analyst Rob Owens upgraded NOW to Overweight with a price target of $650. However, the stock recently witnessed a decline in hedge fund sentiment. Moreover, the effects of the COVID-19 omicron variant and an increasing number of cyber-attacks make its near-term prospects uncertain.

Here’s what could shape NOW’s performance in the upcoming months:

Robust Financials

NOW’s net sales increased 29.1% year-over-year to $1.61 billion in the fourth quarter ended December 31, 2021. The company’s operating income grew 94.4% year-over-year to $35 million. Also, its net income came in at $26 million, up 52.9% year-over-year. The company’s EPS climbed 62.5% year-over-year to $0.13.

Favorable Analyst Estimates

For fiscal 2022, analysts expect NOW’s EPS and revenue to grow 24.7% and 25.4% year-over-year to $7.38 and $7.39 billion, respectively. In addition, its EPS is expected to grow at 26.1% per annum over the next five years. Moreover, Wall Street analysts expect the stock to hit $685.22 in the near term, indicating a potential upside of 17.9%.

Lower-than-Industry Profitability

In terms of trailing-12-month EBIT margin, NOW’s 4.66% is 48.4% lower than the industry average of 9.04%. Likewise, its trailing-12-month net income margin of 3.90% is 41.1% lower than the industry average of 6.62%. Moreover, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 7.04%, 3.16%, and 2.13% are lower than the industry averages of 8.50%, 4.91%, and 3.91%, respectively.

Stretched Valuation

In terms of forward P/S, NOW’s 15.59x is 314.9% higher than the industry average of 3.76x. Likewise, its forward P/B of 22.26x is 310.1% higher than the industry average of 5.43x. Moreover, the stock’s forward EV/S and non-GAAP P/E of 15.59x and 78.92x are higher than the industry averages of 3.88x and 22.77x, respectively.

POWR Ratings Don’t Indicate Enough Upside

NOW has an overall rating of C, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. NOW has a D grade for Value, in sync with its higher-than-industry valuation ratios.

NOW also has a D grade for Momentum, consistent with its 15.4% decline over the past three months. In addition, the stock has a C grade for Stability, compatible with its beta of 1.04.

NOW is ranked #15 of 59 stocks in the D-rated Software – Business industry. Click here to access NOW’s ratings for Growth, Sentiment, and Quality as well.

Bottom Line

NOW is currently trading below its 50-day and 200-day moving averages of $601.58 and $589.52, respectively, indicating a downtrend. However, NOW looks overvalued at the current price level, and it could be wise to wait for a better entry point in the stock.

How Does ServiceNow Inc. (NOW) Stack Up Against its Peers?

While NOW has an overall POWR Rating of C, you might want to consider investing in Software – Business stocks with an A (Strong Buy) or B (Buy) rating, such as F5 Networks, Inc. (FFIV - Get Rating), Agilysys, Inc. (AGYS - Get Rating), and VMware Inc. (VMW - Get Rating).

NOW shares were trading at $567.15 per share on Thursday afternoon, down $14.00 (-2.41%). Year-to-date, NOW has declined -12.63%, versus a -5.26% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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