Analyst: ServiceNow Shares Make The Perfect Children's Gift

Bernstein recommends ServiceNow Inc NOW as a perfect gift for children, given its view that it is a high-quality, long-term growth opportunity.

Not Getting Its Due

Analyst Zane Chrane believes the consensus revenue forecasts for the company do not give sufficient credit to the company for the size of its total addressable market, management's proven ability to expand into new markets, weaker competition in its core IT markets and long-term margin expansion opportunity.

Medium-Term Revenue Outlook Above Consensus

Bernstein expects the company to report beat-and-raise revenues for the next several years, given the strength in its core ITSM and ITOM markets as well as the potential offered by its new and emerging solutions.

Specifically, the firm expects 33-percent compounded annual growth rate in revenues through 2020, which is above the consensus forecast for 31-percent revenue growth.

Consequently, the firm models revenues of about 5–7 percent above the consensus estimates for fiscal years 2018 to 2020.

Buy On Dips

The firm, though of the view that there is risk of multiple compression, said it would be buyers of price dips.

"However, 'pull-backs' may be unlikely and/or infrequent considering the unique execution strength ServiceNow continues to demonstrate ADBE," the firm added.

Bernstein believes the company's long-term opportunity in its markets continues to be underappreciated. The firm views the company as a high-quality SaaS vendor that has a clear path of defensible growth over the next three years as FCF margins expand beyond 30 percent.

"We strongly believe ServiceNow should be a core long-term holding for any growth or tech-focused investor," the firm added.

As such, Bernstein rates ServiceNow an Outperform, and it raised the price target for the shares from $120 to $141, to reflect an increasing trend of investors preferring FCF to value the company.

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