ServiceNow Serves Up A Reversal, Now!

Key Points

• ServiceNow announced a $1.5 billion buyback plan that has shares moving higher. 
• The buybacks are intended to offset dilutive activities and leave plenty of cash flow for growth. 
• Analysts are boosting their targets and may drive this market into reversal. 

ServiceNow NASDAQ: NOW surprised the market when it announced a massive share repurchase authorization. The authorization was announced at the shareholder event and is worth $1.5 billion. That’s worth more than 1.5% of the market cap and is intended to offset the impact of future dilution related to equity grants and employee stock purchases. The best part is that repurchases come from free cash flow and are insufficient to offset the growth outlook. ServiceNow, like all cloud computing companies, is a growth company that requires ample cash to fund development and expansion. 

“Given the current macro environment and our strong cash flow generation, we believe that using a portion of our free cash flow to manage dilution is a strategic use of capital," NOW CFO Gina Mastantuono.

The Analysts Raise Their Targets For ServiceNow 

The analysts were bullish on ServiceNow before the announcement and are raising their price targets now. The news sparked at least 4 price target increases with the stock trading range of $510 to $560. The midpoint of the range and average of the new targets is above the Marketbeat.com consensus target, leading the market higher. This activity comes just weeks after the Q1 earnings release, a release that triggered several price target increases and an upgrade to Neutral from Sell by BNP Paribas. 

The Q1 results were strong and pointed to additional strength later in the year. The company beat on the top and bottom lines and guided the market higher on the increase in large contracts. This is not surprising given the shift toward digitization and cloud-based services shown by other cloud-computing companies, and it may not be the last time guidance is raised this year.

Among the avenues for growth available to ServiceNow is AI. The company is expected to enhance its offerings with AI-powered services as soon as this year, which could aid its internal efficiency and clients—the firm plans to use OpenAI and Microsoft Azure capabilities to further that end. 

The Institutional Tide Is Shifting For ServiceNow 

Institutional selling was vigorous in 2022, with sales outpacing purchases by more than 3:1. The pace of activity has slowed from the peak and shifted in favor of the bulls, with buyers outpacing the sellers by a slim margin in calendar Q1 and activity roughly equal in Q2. This shift can be seen in the chart, which shows a bottom. Assuming this trend continues, the stock could easily complete a reversal. This was foreshadowed by price action following the Q1 release. Regarding the insiders, the insiders have only been selling their shares, but the activity is light, spread among a broad array of executives, and consistent with share-based compensation. 

The chart is favorable. Price action is up roughly 5% following the repurchase announcement and has the market at a critical resistance point. A sustained rally may form if the market can clear that point near $495. In that scenario, the stock could trend toward the analysts' $530 consensus target and set the stage for a more pronounced recovery. If not, this stock could be range-bound at current levels until Q2 and Q3 results are released later in the year.