ServiceNow (NOW - Get Rating) provides cloud-based services that automate IT operations. NOW’s offerings are highlighted by an application suite built into its proprietary platform to automate workflows and integrate processes.

Based in Santa Clara, California, NOW is held in high regard throughout the tech industry. The company’s cloud computing services make digital workflows more efficient, empowering businesses to boost productivity by streamlining their processes. In short, NOW makes it easy for its customers to design workflow applications, ultimately decreasing the amount of time it takes to complete complex and repetitive processes.

NOW’s value proposition certainly has its merits. However, providing something of value does not necessarily guarantee a stock’s price will increase.  So, here’s what we think could shape NOW’s performance in the near term:

Click here to check out our Software Industry Report for 2021

NOW’s Prospects

NOW stock has a high forward P/E ratio of 100.38. This is a high ratio even for a tech stock. NOW is currently trading about $50 below its 52-week high of $598.37, meaning its forward P/E ratio will climb even higher if it reclaims its 52-week high.

The company has secured business from more than three-quarters of the Fortune 500 companies, raking in $4.5 billion in annual revenue. Its fourth quarter numbers were solid, helping to propel the stock even higher, although a good argument could be made that it is overpriced. In the fourth quarter, ended December 31, 2020,  NOW’s revenue  increased 31% versus the same quarter in the year prior.

NOW’s customers with yearly contract values of $1 million or more increased by nearly 100 contracts in the past three months.  NOW has 1,093 of such high-value customers. However, its R&D expenses jumped nearly 50% in 2020. In total, NOW spent a billion dollars on R&D in the prior year. The outlay amounts to nearly one-quarter of the company’s revenue.

NOW According to the Analysts

Wall Street analysts believe NOW is underpriced, setting an average target price of $608.79. If the stock were to increase to this level, it would have popped by about 14%. However, the lowest target price for the stock is $400. Of the 31 analysts who have studied the stock, 16 consider it a Buy, 12 consider it a Strong Buy and three consider it a Hold.

NOW’s POWR Ratings

NOW has an overall  C POWR Ratings grade. The stock has C grades in the Momentum, Stability and Growth components of the POWR Ratings. It  also has a D grade in the Value component. Investors who would like to learn how NOW fares in the Quality and Sentiment components of the POWR Ratings can do so by clicking here.

Of the 61 publicly traded companies in the Software – Business category, NOW is ranked 24th overall. The Software – Business sector has a D POWR Rating grade. If you would like to find out more about the stocks in the Software – Business category, you can do so by clicking here.

Buy, Sell or Hold?

Hold. NOW is certainly tempting because it is ranked in the top half of  stocks in the Software – Business category. Yet its POWR Ratings leave much to be desired. NOW does not have a single POWR Rating component grade higher than a B. Furthermore, most of the company’s POWR Rating component grades are Cs or worse.

Though NOW has exhibited solid growth, its  growth is decelerating, meaning the company’s upside might not be as significant as most assume. The stock is currently trading at nearly 20 times yearly sales. With these factors in mind, we think investors should steer clear of NOW until it declines to a more reasonable price.

Click here to check out our Software Industry Report for 2021

NOW shares were unchanged in after-hours trading Wednesday. Year-to-date, NOW has declined -1.02%, versus a 10.41% rise in the benchmark S&P 500 index during the same period.

About the Author: Patrick Ryan

Patrick Ryan has more than a dozen years of investing experience with a focus on information technology, consumer and entertainment sectors. In addition to working for StockNews, Patrick has also written for Wealth Authority and Fallon Wealth Management. More...

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