ServiceNow (NYSE: NOW) shares advanced 6.2% in Thursday trading after TD Cowen raised its price target on the enterprise software company to $165 from $140, maintaining a Buy rating. The move came as investors rotated into established software names amid a sell-off in semiconductor stocks and growing concerns over debt-heavy AI companies.
Analyst Derrick Wood cited expectations for a strong third-quarter performance, driven by customer upgrades to ServiceNow's IT service management (ITSM) Prime tier, growth in its security products, and robust demand from US federal agencies. The company is scheduled to report its third-quarter results on October 28.
Rotation into Enterprise Software
The sector's relative strength emerged as fresh inflation data reinforced worries that prices and borrowing costs could stay elevated for longer. US producer prices rose 1.3% in September from the previous month, more than double the 0.5% economists had forecast, according to the Bureau of Labor Statistics. Annual producer price inflation reached 6.3%, the largest increase since December 2022, versus expectations of 5.3%. Core producer prices, excluding food and energy, climbed 0.7% month over month and 5% year over year.
The consumer price index released Wednesday also came in hotter than expected, with headline inflation at 3.7% against forecasts of 3.6%. Against this backdrop, investors favored established enterprise software businesses as concerns about debt exposure weighed on AI-related companies. ServiceNow offers enterprise AI exposure through its software products, while TD Cowen's analysis highlights its comparatively modest debt burden.
Other software names also gained, with Salesforce rising nearly 4%, Adobe up more than 3%, and Oracle climbing 2.8%. The iShares Expanded Tech-Software Sector ETF (IGV) added about 1.05%, while the VanEck Semiconductor ETF (SMH) fell 2.11%, heading for its eighth consecutive losing session.
TD Cowen Expects Strong Q3 Results
Wood's channel checks indicate customers are upgrading to ServiceNow's ITSM Prime tier and purchasing more of its other core products. He also expects the company's Armis security business and US federal operations to outperform expectations. TD Cowen sees scope for a modest acceleration in growth in current remaining performance obligations (cRPO), which measure contracted revenue expected to be recognized over the next 12 months.
According to Wood, one partner reported that around half of renewal discussions now result in AI upgrades, typically to Prime. These upgrades can increase average selling prices by roughly 30%, providing another potential source of revenue growth. The earnings release on October 28 will offer investors an opportunity to assess whether the anticipated improvement in cRPO growth is materializing. Wood also sees the company's stronger security positioning and growth in AI-related contracts as potential supports for further valuation gains.
Valuation and Debt in Focus
ServiceNow shares have gained more than 55% since the company reported its second-quarter results. TD Cowen's revised $165 price target is based on approximately 24 times enterprise value to projected 2027 free cash flow, compared with around 20 times at current prices. The analysis also places the stock's valuation at roughly 40% below its five-year average of about 40 times next-twelve-month free cash flow.
The firm estimates ServiceNow's net debt at approximately $3.8 billion, against a market value of $144.7 billion. Its annual contract value tied to AI has also surpassed $1 billion, according to TD Cowen. However, the analyst's identified risks include ServiceNow's dependence on IT service management and its reliance on large, multimillion-dollar deals.
This article is for informational purposes only and does not constitute financial advice.
