ServiceNow (NOW 1.21%) stock has marched to new highs this year, and Wall Street analysts are generally bullish on the stock's prospects.
Samad Samana has a "buy" rating on ServiceNow, and the Jefferies analyst recently raised their price target from $900 to $1,100, implying near-term upside of 20% for the stock. ServiceNow's software has been in high demand as businesses look for ways to improve employee productivity. However, the stock's high price-to-earnings ratio already has a lot of growth baked into it. Here's why it might still be worth paying a premium to own ServiceNow.
Why buy ServiceNow stock
The stock currently trades at a forward price-to-earnings (P/E) ratio of 55.5 based on 2025 earnings estimates. This is expensive, even relative to ServiceNow's underlying growth. In the second quarter, subscription revenues grew 23% year over year. The company expects full-year revenue and free cash flow to increase 22% and 31%, respectively.
There are a few reasons that justify paying a premium for the shares, and why they might hit the analyst's price target. ServiceNow benefits from a subscription-based business model, and it converts subscription revenues into free cash flow at a high margin of 30%. Highly profitable businesses with recurring revenue are generally rewarded with premium valuations.
Another reason is that ServiceNow is considered elite in workflow management software. Businesses can't live without it, especially with ServiceNow currently offering its Now Assist product with Microsoft Copilot. In Q2, ServiceNow signed 11 deals for Now Assist with each worth over $1 million.
Within the last five years, the stock has traded at a valuation multiple as low as 26 and as high as 95 on a forward P/E basis. Companies that sustain above-average growth can look expensive for years and continue to outperform the broad market.
The company will announce third-quarter earnings results on Oct. 23. ServiceNow is expected to report another strong quarter, and assuming it also offers a strong outlook, the shares should continue marching toward that $1,100 price target.
