NOW Is The Time; Analyst Explains Why ServiceNow Is Still A Buy

As such, the firm upgraded ServiceNow shares from Neutral to Buy and bumped up the price target from $108 to $140.

The shares of the company have been up 68 percent in the year-to-date period compared to the 26 percent gain by the Technology Select Sector SPDR Fund XLK.

The firm clarified that although it is positive on near-term fundamentals, its call on ServiceNow is long-term call on the sustainability of its leading efficiency score of 58 percent.

Analyst Alex Zukinsaid the fundamentals have improved since his earlier downgrade, which was premised primarily on valuation and the macro environment that prevailed at that time. The analyst believes the durability of the company's efficiency scores makes it one of the more compelling long-term opportunities in his coverage (see Zukin's track record here).

Citing channel checks, the analyst said the company beat internal plan across geographies in the third quarter, with the U.S. bookings driven by outsized Federal success. The analyst also noted that short interest in the shares has been steadily building, with short interest now representing 6.9 percent of the float and 9.8 days to cover, up from 6.4 percent and 4.7 days in the previous quarter, and 5.5 percent and 7.7 days in the year-ago quarter.

Premised on bookings outperformance and the increased short interest, Piper Jaffray sees the potential for an outsized post-quarter stock price move.

Additionally, the firm said the company operates in favorable markets, where 30 percent, plus, growth could be sustained over the next three to five years.

"Our conversations with partners and customers have made us incrementally more comfortable that this growth trajectory is sustainable, supported by the company's growing success outside of ITSM and increased confidence in John Donahoe's ability to execute this vision as CEO," the firm added.

Piper Jaffray sees a premium multiple, supported by a structurally higher margin profile, which it feels will appeal to a larger set of shareholders over time more like Adobe Systems Incorporated ADBE and less like salesforce.com, inc. CRM and Workday Inc WDAY.

That said, the firm said it is vital for the company's current margin framework on both operating margins and cash flow to be sustainable over time.

"So, to reiterate our call, the combination of a favorable near-term setup combined with substantial long-term growth opportunity support our decision to upgrade NOW now," the firm concluded.