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Buy This Growth Stock to Bet on AI-Powered Search
Artificial intelligence (AI) is reshaping industries, particularly in GenAI search, by enhancing real-time data access and creating personalized user experiences. Alphabet's (GOOGL) Google has long been the front-runner, setting benchmarks with its advanced search technology.
As AI changes the game, California-based software maker ServiceNow, Inc. (NOW) is looking to make its mark, too. After steadily building its AI search capabilities, ServiceNow made a major acquisition last week to boost its GenAI-powered search tech. Fresh off a solid Q2 report, Wall Street's enthusiasm for ServiceNow is palpable, with consensus projections calling for triple-digit earnings growth this year and significant upside in the stock price.
As AI-powered search transforms the digital landscape, this high-growth pick should be on the radar of investors in search of the next big breakout tech stock. Let’s take a closer look.
About ServiceNow Stock
Founded in 2004, Santa Clara-based ServiceNow, Inc. (NOW) is a cloud computing specialist, providing end-to-end intelligent workflow automation platform solutions for digital businesses, with a market cap of $166.9 billion.
Through its Now platform, it automates workflows, harnessing AI and machine learning to streamline IT services, operations, and risk management. From asset management to customer service, ServiceNow's suite covers it all, serving industries like finance, healthcare, and tech.
Over the past 52 weeks, shares of the software company have rallied 41.6%, leaping past the returns of its parent S&P 500 Index ($SPX), up 21.6% for the period. In 2024 alone, NOW is up 18.4%, again edging past the SPX’s performance.
Priced at 59 times forward adjusted earnings and 15.36 times sales, NOW stock doesn’t exactly trade at a discount. However, its price/earnings-to-growth (PEG) ratio of 1.84 compares favorably to the tech sector median of 1.94, suggesting the stock is reasonably valued compared to its expected growth.
ServiceNow Exceeds Q2 Earnings Projections
On July 24, ServiceNow impressed Wall Street with strong fiscal Q2 earnings, beating expectations on both the top and bottom lines. Total revenue grew 22% to $2.6 billion, with subscription revenue up 23% at $2.54 billion. Adjusted EPS jumped 32% to $3.13.
The company secured 88 deals worth over $1 million in annual contract value (ACV), a 26% increase, and ended the quarter with $18.6 billion in remaining performance obligations, up 31.5% year-over-year on a currency-adjusted basis.
Highlighting the beneficial impacts that AI is having across its enterprise software platform, the company aims to "reinvent every workflow, in every company, in every industry with GenAI at the core."
ServiceNow is not just basking in its stellar Q2 results, but also setting the stage for future success. For the current quarter, management projects sales between $2.66 billion and $2.665 billion, reflecting expected 20.25% growth.
For fiscal 2024, expectations are even brighter. Subscription revenues are forecast to range between $10.575 billion and $10.585 billion, a 22% boost. Additionally, management is estimating a solid 29.5% operating margin and a 31% free cash-flow margin.
Analysts tracking ServiceNow anticipate the company’s profit per share to surge a whopping 129.5% to $6.84 in fiscal 2024, and jump by another 28.5% to $8.79 in fiscal 2025.
ServiceNow's AI Search Revolution
ServiceNow just turbocharged its AI game by acquiring Raytion on July 24, a strategic move that amplifies its GenAI search capabilities. Raytion's top-tier info retrieval tech will blend seamlessly with ServiceNow’s AI Search, offering real-time, unified access to crucial data across enterprise systems. Users can effortlessly locate information without pinpointing its exact source.
The integration will enable a smarter, personalized search experience, pulling from every corner of enterprise knowledge. This upgrade boosts self-service and case deflection thanks to a single, streamlined entry point.
As Alphabet faces rising competition from OpenAI's SearchGPT, which aims to rival Google's dominance, ServiceNow's acquisition of Raytion is a key strategic move that gives it a significant edge in the increasingly competitive AI search space. By betting big on AI, ServiceNow is reshaping the future of work and setting a new standard for enterprise search.
What Do Analysts Expect for ServiceNow Stock?
Last week, RBC Capital maintained its “Outperform” rating on NOW stock and raised the price target from $850 to $880, implying an upside potential of 5.6%.
Riding high on a strong Q2, the brokerage firm highlights that ServiceNow's GenAI and ProPlus products are gaining momentum, showing promising results from GenAI monetization. As the company gears up for a robust second half of 2024, RBC Capital recommends ServiceNow as a top pick, highlighting its compelling investment potential.
Analysts at other brokerage firms, like TD Cowen, JMP Securities, and Wells Fargo, also raised their price targets on NOW stock after its stellar Q2 earnings release.
Analysts are upbeat about NOW stock’s prospects, with a consensus “Strong Buy” rating overall. Among the 33 analysts covering the stock, 28 are highly bullish with a “Strong Buy,” two advise a “Moderate Buy,” two suggest a “Hold,” and the remaining analyst is taking a contrarian stance with a “Strong Sell.”
The mean price target for NOW is $853.57, indicating an upside potential of 2.6% from current levels. The Street-high target price of $950 implies the stock could rally as much as 14.2%.
On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
