ServiceNow shares NOW rose 6.2% in trading on Thursday after TD Cowen raised its price target on the enterprise software company to $165 from $140 and reiterated its Buy rating.
Analyst Derrick Wood expects a strong third-quarter performance, supported by customer upgrades, growth in security products and demand from US federal agencies.
The gains came as investors rotated into enterprise software stocks amid a broader sell-off in semiconductor shares and concerns about heavily indebted artificial intelligence companies.
The shift lifted several software names, with Salesforce gaining almost 4%, Adobe rising 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.
Investors rotate into enterprise software
The sector’s relative strength came as fresh inflation data reinforced concerns that prices and borrowing costs could remain elevated for longer.
US producer prices rose 1.3% in September from the previous month, more than double economists’ forecast of 0.5%, according to the Bureau of Labor Statistics.
Annual producer price inflation reached 6.3%, against expectations of 5.3%, marking the largest increase since December 2022.
Core producer prices, which exclude food and energy, increased 0.7% month over month and 5% year over year.
The consumer price index released on Wednesday also came in hotter than expected, with headline inflation reaching 3.7%, compared with forecasts of 3.6%.
Against this backdrop, investors appeared to favour established enterprise software businesses as concerns about debt exposure weighed on AI-related companies.
ServiceNow offers exposure to enterprise AI through its software products, while TD Cowen’s analysis points to its comparatively modest debt burden.
TD Cowen expects strong third-quarter results
Wood’s channel checks indicate that customers are upgrading to ServiceNow’s IT service management (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 recognised 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.
ServiceNow is scheduled to report its third-quarter results on October 28.
The earnings release will offer investors an opportunity to assess whether the anticipated improvement in cRPO growth is materialising.
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 remain 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.
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