ServiceNow Stock Downgraded by Morgan Stanley

Shares in ServiceNow (NYSE:NOW) fell by over 1.5% in premarket trading on Monday after Morgan Stanley analysts downgraded the stock from Overweight to Equal Weight.

This downgrade follows a significant increase in the cloud software maker's shares, which have surged nearly 70% over the past year—far exceeding the software sector's average gain of 23%.

As a result of this rise, ServiceNow’s valuation has surpassed Morgan Stanley's previous price target of $900, prompting the firm to adjust it to $960.

Morgan Stanley's decision stems from concerns about the absence of "meaningful valuation upside," despite consistent demand and solid execution from the company.

The analysts pointed out that ServiceNow shares are currently trading at 1.9 times enterprise value (EV) to forecasted 2025 free cash flow (FCF) growth, which matches the large-cap average and significantly exceeds competitors in the system of record category.

While the adoption of ServiceNow's Pro Plus remains a crucial growth driver, analysts have observed a growing hesitancy among customers regarding pricing, which has begun to extend deal cycles.

Morgan Stanley noted, "While we continue to believe in strong adoption with Pro Plus, we see this as largely priced in, and seat-based pricing concerns have been less prevalent in investor discussions."

Additionally, the analysts remarked on the differing expectations priced into various companies, despite similar opportunities and risks.

Morgan Stanley also raised concerns regarding product leadership in light of the departure of CJ Desai, ServiceNow's former president, amid internal investigations. Following this, Chris Bedi has been appointed as interim Chief Product Officer.

The analysts expressed uncertainty about the long-term implications of this leadership change on the company’s product development and direction.

In conclusion, while the analysts recognize ServiceNow's solid execution and the strong adoption of the Pro Plus SKU, they believe these factors are already factored into the current valuation, prompting them to adopt a more cautious stance.