Cloud computing giant ServiceNow (NASDAQ: NOW) started the week with a strong performance. It rose 2.5% in pre-market trading today and has managed to hold on to most of those gains for now. The biggest reason for ServiceNow’s gains came from an upgrade at Guggenheim.
Guggenheim analyst John Difucci upgraded ServiceNow from “Neutral” to Buy, thanks to two key factors. One, a set of profit margins that Difucci called “impressive,” and two, a solid customer base that doesn’t seem likely to shrink much in the face of worsening economic conditions.
There is a strong case for being bullish on ServiceNow – strong enough for me to agree with it and declare a bullish stance myself. However, there will be some downsides to this, so watch out for those as well.
The last 12 months for ServiceNow shares have continued to decline. This time last year, shares were up around $688. That proved to be about as good as it gets for ServiceNow, with a 52-week high of $707.60. The decline began in mid-November. Today, the stock is trading at around $368.
Buy ServiceNow Stock?
Turning to Wall Street, ServiceNow has a Strong Buy consensus rating. That’s based on 25 Buys and three Holds assigned over the past three months. ServiceNow’s average price target of $531.37 indicates 44.2% upside potential. Analyst price targets range from a low of $460 per share to a high of $650 per share.
Investor Sentiment is Not the Greatest
One of the biggest issues facing ServiceNow right now is a string of red flags popping up in its investor sentiment metrics. Currently, ServiceNow has a Smart Rating of 5 out of 10 on TipRanks.
That’s slightly below the midpoint of the scale, putting it a little below pure neutral. This suggests that the stock is slightly more likely to lag the broader market than it is to outperform.
While ServiceNow enjoys analyst acclaim, its stance among its own insiders is a different matter. Insider trading at ServiceNow is becoming somewhat negative. The last “knowledgeable” transaction in the company was a Sell two months ago.
CFO Gina Mastantuono sold just over $1.87 million of shares. That’s just one of the Informative Sells that have taken place over the past three months, leading to a combined total of about $4.8 million.
The aggregate, meanwhile, will provide some support to the bulls. In the last three months, insiders sold $4.8 million in shares, but insiders sold the stock 20 times while insiders bought shares 24 times. That’s a narrow margin for buying interest.
Meanwhile, over the past 12 months, insiders sold the stock on 75 occasions but bought on 92.
Potential Greatness
The good news for ServiceNow investors is that there’s quite a bit going on that could make ServiceNow a good potential Buy right now. Sure, it has a lot of analyst support, but there’s more to look at than that.
First, there is a good buy-in point now. The company has lost nearly half of its value over the last 12 months. It’s not only below its lowest price target, but it’s also flirting with 52-week lows.
Plus, ServiceNow’s current picture, as Difucci expressed, is positive enough. Solid profit margins and a customer base that seems poised to stay there are good signs, and ServiceNow isn’t resting on its collective laurels either. It improves its value proposition and makes itself more valuable to its customers.
For example, ServiceNow recently partnered with Lucid Software to create a new level of integration. Lucid Software’s connection brings
Lucid’s intelligent diagramming tools in the ServiceNow Store. With it, users can take ServiceNow Application Portfolio Management (APM) data and convert it into Lucidchart diagrams.
That, in turn, will make it easier to evaluate an existing portfolio of applications. Businesses will find issues with their setups faster and strive to make their operations the best they can.
Just a few weeks ago, ServiceNow also acquired Era Software. That acquisition will give ServiceNow the means to offer a “unified monitoring solution at scale.”
Such a tool will enhance companies’ progress toward digital transformation, a process many companies have been working on for the past decade or so, and those are just two of several acquisitions ServiceNow has recently made.
Some here may be concerned about the general economic environment and its impact on ServiceNow – and not without reason. A big enough downturn would hit ServiceNow hard. Many of its client companies may cancel purchases to save money or close entirely.
That would leave ServiceNow in a bad position, scrambling to find new buyers in a market where everyone’s hand is in his wallet. However, there are signs that a bad environment could be good news for ServiceNow. All you have to do is focus on automation.
Because many of ServiceNow’s tools can be run automatically, that’s a function that requires no employee—and no salary—to launch.
ServiceNow can establish itself as a savings generator. All it needs to do is show that in its marketing collateral. Even better, it can generate savings by bringing more ServiceNow operations. Purchasing firms may perform a function with a one-time cost rather than an ongoing one.
ServiceNow also has a recent case it can point to. The company works with Astellas Pharma (OTC: ALPMF) to improve its automation, giving employees the freedom to “focus on higher-value tasks.”
Conclusion: Bullish, but Watchfully So
There are some potential issues ahead for the company. Its insider trading picture is alarming, though there are no bright spots throughout. Analyst support couldn’t be better. A general economic downturn, if it’s severe enough, could hit ServiceNow hard. However, ServiceNow can beat that with the right marketing push.
A company that does well in good times is a stable company. A company that can use bad times in its favor is a completely different matter. That’s why I’m all for ServiceNow. This is a company that can make a case for itself even in the worst of times.
Disclosure